Issuer Characteristics Research Articles

The dollar versus the euro as international reserve currencies

We begin by examining determinants of aggregate foreign exchange reserve holdings by central banks (size of issuing country’s economy and financial markets, ability of the currency to hold value, and inertia). But understanding the determination of reserve holdings probably requires going beyond the aggregate numbers, instead observing individual central bank behavior, including characteristics of the holding country (bilateral trade with the issuing country, bilateral currency peg, and proxies for bilateral exposure to sanctions), in addition to the characteristics of the reserve currency issuer. On a currency-by-currency basis, US dollar holdings are somewhat well explained by several issuer characteristics; but the other currencies are less successfully explained. It may be that the results from currency-by-currency estimation are impaired by insufficient sample size. This consideration offers a motivation for pooling the data across the major currencies and imposing the constraints that reserve holdings are determined in the same way for each currency. In this setting, most economic determinants enter with significance: economic size as measured by GDP, bilateral currency peg, and bilateral trade share. While one geopolitical factor (congruence in voting in the UN) is typically significant in the expected manner (with the exception of the US dollar), the other geopolitical factor (sanctions) does not enter with significance.

Headline Impression Management in the Earnings Press Releases of TSX Venture Exchange Firms*

ABSTRACTThis paper explores firms traded on the Toronto Stock Exchange (TSX) Venture Exchange and their voluntary disclosure practices by focusing on earnings press releases (EPRs). We compare the characteristics of EPR issuers and non‐issuers and investigate how the former group uses headline impression management in their EPRs to highlight firm performance. More precisely, we examine emphasis and tone management techniques in the headlines of over 1,300 EPRs by TSX Venture Exchange (TSX‐V) firms. Our results show that the main determinants of the EPR disclosure choice are the achievement of positive revenue, an increasing trend in firm market value, and industry type. We find that EPR issuers reinforce and repeat positive results in the headlines of EPRs and use positive tone management to highlight positive financial performance. Our results confirm the association between firm performance and strategic placement of performance results, while illustrating that the strength of this association varies by industry and by EPR characteristics such as EPR length and numerical intensity. Overall, this paper sheds light on TSX‐V firms, their disclosure practices, and potential violations of recommendations from regulators regarding avoiding exaggerated or promotional language in press releases.

Covenants in convertible bonds: Boon or boilerplate?

This paper examines the role of restrictive covenants in convertible bonds. After controlling for standard covenant intensity determinants, an average convertible bond offering has 3.21 fewer covenants than an average straight bond offering. While covenants negatively affect straight bond yields, there is no negative association between covenants and convertible bond yields. Moreover, contrary to straight bond covenants, convertible bond covenants are set largely independently of issuer characteristics. Overall, our findings suggest that the conversion option and certain covenants are substitutes for addressing debt-related financing costs. The few covenants included in convertibles represent irrelevant boilerplate clauses.

Catastrophe bond pricing in the primary market: The issuer effect and pricing factors

COVID pandemic has highlighted the importance of hedging against catastrophic events, for which the catastrophe bond market plays a critical role. Our paper develops a two-level modelling and uses a unique, hand-collected dataset, which is one of the largest and most detailed datasets to date containing: 101 different issuers, 794 different bonds, spanning 1997–2020. We identify issuer effects robustly, isolating them from bond specific pricing effects, therefore providing more credible pricing factor results. We find that bond pricing and volatility are heavily impacted by the issuer, causing 26% of total price variation. We also identify specific issuer characteristics that significantly impact bond pricing and volatility, such as the issuer’s line of business accounting for up to 36% of total price variation. We further find that issuer effects are significant over different market cycles and time periods, causing substantial price variation. The size and content of our data also enables us to identify the counter-intuitive relation between bond premiums and maturity, and bond premiums and hybrid bond triggers.

Impact of regulatory policies on green bond issuances in China: policy lessons from a top-down approach

ABSTRACT This study examines whether the green bond policies of major Chinese financial regulators’ have a direct and positive impact on the green bond market. Using Chinese green bond issuances from 2012 to 2019, we analyze green bond issuer response to top-down regulatory policies post 2014. Using a difference-in-difference model, we find a direct positive influence of green bond regulatory policies on issuance amounts. Additional analysis shows that specific issuer characteristics like ownership type (government-owned), industry type (green industry), and sector type (financial issuer) have a stronger positive reaction to policy announcements and led to the issuance of more green bonds. Our results highlight the supporting role of financial regulators in advancing the green finance agenda in China. Key policy insights Green bond policies implemented by Chinese financial market regulators have been an effective means to increase overall green bond issuances Certain issuer types react more positively by increasing their green bond issuances following the announcement of green bond policies Pro-active participation by key financial regulators in the form of harmonized definitions, consistent engagement, and alignment with international best practices can be beneficial for stimulating green finance growth

Classifying the characteristics of insurance shares: a k-means clustering approach

This study aims to apply the k-means clustering method in understanding the characteristics of insurance shares. The eight issuers are divided into three clusters based on price and rate of return. The k-means method's application shows that each cluster has different characteristics, especially for the price variable. Test with panel data regression also discovers different patterns between clusters 2 and 3 in responding to changes in interest rates. The findings of this study indicate that k-means clustering can be used as an initial analysis to understand the characteristics of issuers that investors can use to increase the optimal probability of return.

Banking stock price movement and macroeconomic indicators: k-means clustering approach

This study investigates the price movement characteristics of banking issuers listed on the Indonesia Stock Exchange with macroeconomic indicators as an exogenous variable. By using the k-means clu...

For the Love of the Environment: An Analysis of Green versus Brown Bonds During the COVID-19 Pandemic

Increased awareness among investors about environmental and social issues made green bonds a popular investment alternative over the last decade. This study analyzes whether the primary and secondary market return performance of green bonds is affected from the market conditions induced by the pandemic. Results presented in this study show that while both green and comparable conventional (brown) bonds experienced a decline in their primary market yields following the start of the pandemic, the decline for the green bonds was somewhat larger, resulting in an even larger ‘greenium’ during the pandemic (32 basis points for corporate and agency issuers). Secondary market results of the study confirm the strong demand for green bonds in this market as well and show that while both green and brown bonds experience a decline in their secondary market returns during the pandemic, the decrease in brown bond returns is 45 basis points larger compared to green bonds. Findings also suggest that failure to take into account issuer characteristics may lead to biased results when green bonds are compared against their conventional alternatives.

The Microstructure of the Brazilian Market for Corporate Bonds

Purpose – The Brazilian government approved regulations to foster the corporate bond market. In 2009, Instruction 476 of the Comissao de Valores Mobiliarios (the Brazilian capital market regulator) relaxed the requirements for issuing bonds. In 2011, Law 12,431 created infrastructure bonds, which give individuals tax exemptions. Since then, aggregate proceeds have more than tripled. We describe the Brazilian bond market and the characteristics of issues and issuers; and critically evaluate this evolution. Design/methodology/approach – Descriptive analysis. Data on aggregate issuances; bond characteristics (proceeds, maturity, yields, underwriting); issuer characteristics; secondary market (trading); performance (default and renegotiation rates); and allocation of issues. Findings – Bond issues are small and bonds present a short maturity. International agencies are the main ratings providers, using a Brazilian-adjusted rating scale. Fixed-yield bonds are rare. The vast majority of regular bonds are linked to the interbank offered interest rate (DI or CDI). Only two local universal banks dominate the underwriting activity. These banks and their related parties receive more than half of the aggregate allocation. Less than half of issues have an investment grade, and more than half are not rated at all. The incidence of ex-post credit events is most frequently in the form of renegotiations of bond terms. Strict defaults are also high. Liquidity for bonds in the secondary market is low. Originality/value – To our knowledge, this is the first article to describe the microstructure of the Brazilian bond market.

Foreign issuers in emerging growth company IPOs

We examine how the JOBS Act, a regulatory reform that streamlined the process of going public in the US, affected foreign issuers. The reform extended disclosure and offering process accommodations to issuers, including foreign issuers, qualifying as emerging growth companies (EGCs). We find systematic differences in the effects of the shock on foreign issuers, complementing existing evidence on the impact of the JOBS Act. In particular, underpricing of foreign issuer IPOs decreases rather than increases after the shock. Further, greater flexibility in pre-IPO access to potential investors, which is consistent with reduced valuation uncertainty, helps explain the lower underpricing of foreign issuers after the shock. The results are not driven by differences in issuer characteristics, changes in other costs of going public, or other likely sources of confounding. Our findings highlight the differential effects of regulatory shocks on foreign issuers accessing the US market.

Does Trust Level Matter in Sukuk Issuance?

Rather than focusing on issuer characteristics as done in prior studies, this paper presents a macro-level perspective on the role of societal trust in Sukuk issuance. Using a comprehensive sample of global Sukuk issuances spanning over the period of 2001 to 2018 and controlling for issuer characteristics and Sukuk features, we find that the level of societal trust in a country significantly and positively influences the amount of Sukuk issued. These results hold after controlling for time, industry and country-specific fixed effects and are robust under various settings. Moreover, we also unfold a moderating role of societal trust in (i) mitigating the investor risk perception associated with the Sukuk investments reflected by a decline in the yield to maturity and yield spread on Sukuk issuances and (ii) improving the financial performance of the issuing firms.

Mini-Bond-Backed Securities: A Breakthrough for Italian SMEs?

This article offers an overview on the recent Italian regulation of nongranular securitization. A specific legal framework for mini-bonds enables small enterprises to issue and list bonds at a reduced cost and under an advantageous fiscal regime. It incentivizes securitization by improving investors’ insulation against a number of operational risks. The article provides a technical summary of the Elite Basket Bond, the first securitization of diversified mini-bonds, which has the potential to become a benchmark for other similar transactions in terms of pool, issuer characteristics, and liability structure. Recent innovations represent a pivotal effort to make investments in small and medium-sized enterprises (SMEs) interesting for large funds and institutional players and open interesting prospects for investors. Going forward, mini-bond securitizations may represent a structured way to invest in SMEs, thereby enhancing SME access to finance. The Elite Basket Bond is arguably an instrument that is scalable and might be replicated elsewhere in Europe. TOPICS:Fixed income and structured finance, international investing, risk management, legal/regulatory/public policy

Sustainable financing practices through green bonds: What affects the funding size?

AbstractFinancing through the supply‐driven green bonds market has significantly surged in recent years. In this paper, we examine the factors influencing the size of financing though green bond supply, using cross‐section OLS regressions on a global dataset for 8 years (2010–2017) sourced from Bloomberg. We consider a set of tridimensional factors: bond characteristics, issuer characteristics, and market characteristics and examine their effects on issue size. Alongside whole sample estimation, we produce year‐wise estimations to realize the evolution and persistence of the effects over time. We then produce estimates across rating grades of the bonds. Finally, we carry Blinder–Oaxaca decomposition to see if average issue size has significantly changed over time and whether the factors considered can explain the difference. We find a large number of factors affecting issue size asymmetrically; however, many of the effects do not persist over time and are heterogeneous across rating grades. In contrast to the aggregate market trend, we find no evidence of increases in average issue size in the recent year. Furthermore, the average financing size is found significantly lower for high‐grade bonds. The paper provides a basis for encouraging green bond supply, particularly considering the rating of the bonds and the issuers.

The Green Bonds Premium Puzzle: The Role of Issuer Characteristics and Third-Party Verification

If we examine the characteristics of a sample of green bonds matched with their closest brown bond neighbors, we encounter a challenge. Green bonds have higher yields, lower variance, and are more liquid. The institutional/private issuer and the green third-party verification/non-verification breakdowns help explain this puzzle. Green bonds from institutional issuers have higher liquidity with respect to their brown bond correspondents and negative premia before correcting for their lower volatility. Green bonds from private issuers have much less favorable characteristics in terms of liquidity and volatility but have positive premia with respect to their brown correspondents, unless the private issuer commits to certify the “greenness” of the bond. An implication of our findings is that the issuer’s reputation or green third-party verifications are essential to reduce informational asymmetries, avoid suspicion of green (bond)-washing, and produce relatively more convenient financing conditions.

Financial Engineering by City Governments: Factors Associated with the Use of Debt-Related Derivatives

Despite significant coverage in the financial press in recent years, financial engineering by city governments via the use of financial derivatives such as interest rate swaps remain an understudied area of urban financial policy. Indeed, press accounts and other case or conceptual urban studies research emphasizing the downside of these transactions are some of the only sources of information on these instruments. These stories and studies often allude to or speculate on a more basic question: Why would a government choose to enter into a complex financial instrument like a debt-related derivative? This research posits three exploratory hypotheses—financial health, financial experience and/or financial sector influence, and governance structure—culled from media accounts and the urban studies literature on the use of debt-related derivatives by city governments in the United States. It empirically explores these hypotheses by examining the various fiscal, financial, and issuer characteristics of the largest 50 U.S. cities and their choice of whether to use debt-related derivatives. The research finds that the characteristics of government most associated with debt-related derivative use are declining financial condition, increased financial experience and/or financial sector influence, and prior use of interest rate swaps.

Financial innovations in municipal securities markets

PurposeThe purpose of this paper is to measure how frequently innovative financial products appeared or became widely adopted in the municipal securities markets over the last two decades; and also investigate what types of issuers adopted the innovations, the relationship between yields and innovation and the patterns of diffusion within states.Design/methodology/approachUsing comprehensive data on municipal securities issued from 1992 to 2015, the author searches for financial innovations as defined in the literature. The author uses issuer fixed effects models to characterize the relationship between yields and use of innovative products. Other models provide estimates of the conditional correlations between issuer characteristics and innovation usage. Finally, the author fits trend models to identify significant differences in the pace of adoption between different types of issuers.FindingsIn total, 35 security features fit one or more definitions of innovation. Extensive analysis is presented for four innovations that represent significant transfers of risk: variable rates, put options, corporate backers and derivatives. Small issuers used these innovative products, but the largest issuers adopted them to a greater extent. Usage appears to diffuse within states. Issuance of innovative securities fell during the financial crisis and has not recovered. Novel securities since the financial crisis have been created by legislation rather than by market participants.Research limitations/implicationsThe data appear to cover all or nearly all municipal securities, but they do not cover loans or other types of municipal borrowing.Practical implicationsThis analysis reveals that financial innovations in municipal securities markets usually take the form of a rare practice becoming widespread rather than a never-before-seen feature appearing in the market. Changes in response to legislation are an exception.Social implicationsRegulators concerned about financial stability can monitor the expansion of formerly rare securities features. This will be informative about new risks or transfers of risk in the market. They can also anticipate that expanded use of an innovation by states and high-volume issuers will be followed by adoption of the innovations by smaller, less sophisticated issuers in subsequent years.Originality/valueThis paper is the first attempt to empirically analyze the extent of financial innovation in municipal securities. Existing public finance literature has proposed definitions of financial innovation, qualitatively documented some specific innovations and empirically analyzed others. However, no previous study has empirically analyzed the entire municipal securities market for all possible innovations.

When and why firms issue sukuk?

Purpose The purpose of this paper is to analyze whether investors perceive the issuance of sukuk differently than they do in case of conventional bonds, by using event study with superior data. Then, it analyzes whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. Finally, the paper proposes a testable model explaining the investor reaction. Design/methodology/approach This paper uses market model event study to assess investor reaction to the issuance of sukuk. Then, linear and logistic regressions are used to test whether financial characteristics of issuers can explain the abnormal return and likelihood of sukuk issuance. To investigate the differences between sukuk issuers and bond issuers, this paper tests the difference in means of issuer characteristics. Finally, the sample is subdivided into good and bad firm prospects according to dividend/earnings ratio and book-to-market ratio. The subdivisions are used to test the proposed model explaining the investor reaction. Findings The study finds that a large variety of firms issues sukuk. The event study reports significant negative abnormal returns around the announcement date of sukuk issuance. The study also reveals that the earning prospect of issuer firms affect the investor reaction. Firms with lower earning prospect receive a negative reaction from the investors. Also, smaller, or financially unhealthy firms are more likely to issue sukuk. Smaller and riskier firms issue sukuk, because participation in the market is less constrained. In other words, the risk-sharing nature of sukuk might imply that the firm is not confident about the future prospect. However, if the firm has good earnings prospects, investors react to the issuance of sukuk negatively. Research limitations/implications Reliability and availability of data is a hurdle to test the investor reaction model. As more data become available, the models implications can be further tested. Originality/value This paper uses the most complete set of data to study sukuk, making it the most selection bias-free and complete study. Moreover, the proposed investor reaction model will enrich the theory.

Complementarities in Corporate Bond Design

This study examines the joint choice of bond features that corporations make in defining their bonds. Using data on new corporate bond issues from 1990 through 2012, we find that corporate bonds are packages of different provisions and restrictions reflecting complementarities between bond features that change with issuer characteristics. Broadly, we find evidence that asymmetries of information between issuer and investors, agency conflicts between stockholders and bondholders, credit risk, the nature of the firm’s growth prospects, and bond market conditions all play a role in the use or non-use of different corporate bond features.

Does governing law affect bond spreads?

Controlling for bond and issuer characteristics, bond spreads are expected to be equal across different legal jurisdictions, and differences are expected to disappear through arbitrage. However, an analysis of 490 U.S. dollar–denominated bonds issued by 53 emerging market sovereigns during 1990–2015 reveals that after the financial crisis of 2008, launch spreads of sovereign bonds issued under U.K. law have been higher than those issued under U.S. law, by 130 basis points for BB+ bonds and 175 basis points for B− bonds. This effect was not significant for investment grade bonds. On average, bonds issued under U.K. law had weaker ratings and shorter tenors post-crisis. The post-crisis impact of governing law on sovereign bond spreads is not explained by collective action clauses, or first-time bond issuances. Instead, the difference seems to be related to the perception that U.S. law offers stronger investor protection, and that the investor base for bonds issued under U.S. law is larger than that for bonds issued under U.K. law. The difference in spreads persists in the secondary market even after 180 days, perhaps because of the lack of liquidity, as investors tend to buy and hold these more attractive bonds on a longer-term basis.

Bond yield and credit rating: evidence of Chinese local government financing vehicles

Excessive borrowing of local governments in China sparked concerns that the debt may threaten the financial stability of the economy and ultimately cause economic collapse. It becomes critically important to understand the credit rating of China’s local government financing vehicle (LGFV) bonds and the association between the yields, credit ratings, and bond characteristics under this circumstance. We use a complete pooled data set of 771 LGFV bond issues from 1999 to 2011 and OLS and two-stage-least-squares regressions to examine how credit ratings might affect LGFV bond yields and an ordered probit model to study the determinants of credit ratings. The main findings are: (1) bond characteristic variables, such as duration and guarantee, matter in determining yields though credit rating plays a major role in determining yields of LGFV bond issues; (2) bond issue size and bond type are the main determinants of LGFV bond credit ratings, while the bond issuer characteristics have little explanatory power; (3) at least in Eastern China, smaller credit rating agency tend to give better ratings after controlling for bond issuer and issue characteristics.