Public Debt Market Research Articles

The Cost of Debt for REITs: The Mortgage Puzzle

Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firm’s overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure.

Compliance with pension‐related mandatory disclosures and debt financing

AbstractUsing hand‐collected data on the level of pension‐related mandatory disclosures required by International Accounting Standard 19Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension‐related disclosure. Furthermore, we find that firms with higher levels of pension‐related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realisable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension‐related) disclosures on firms’ debt financing. They also have important policy implications.

Compliance With Pension-Related Mandatory Disclosures and Debt Financing

Using hand-collected data on the level of pension-related mandatory disclosures required by International Accounting Standard 19 Employee Benefits, we test whether compliance levels with these disclosures convey information that affects firms’ access to the public instead of the private debt market, as well as the cost of their new debt issues. We document a higher tendency to access the public debt market for firms with higher levels of pension-related disclosure. Furthermore, we find that firms with higher levels of pension-related disclosure enjoy a lower cost in terms of issuance of public debt, but not a lower cost for private debt issues. Thus, the benefits of disclosure in reducing information risk are only realizable when creditors rely heavily on financial statements in their decision making, due to the limited access to private information. Additional tests reveal that high compliance levels effectively mitigate the negative effect of pension deficits on the cost of public debt. These findings provide novel evidence in the extant literature on the role of mandatory (and, in particular, pension-related) disclosures on firms’ debt financing. They also have important policy implications.

Private Credit Under Political Influence: Evidence from France

Formally independent private banks change their supply of credit tothe corporate sector for the constituencies of contested political incum-bents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007–2017 and find that credit granted to the private sector increases by 9%–14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor,banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held.Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector’s effective independence from politically motivated distortions.

Financial Companies in Latvia: Why are they Coming to the Bond Market?

In the period 2013-2017 Latvian corporate bond market had experienced the abrupt growth of the number of public Latvian corporate bond issues outstanding. The base of the expansion was formed by the financing activity of Latvian financial sector issuers (FSIs) with their weight in the pool of corporate bond issues listed in Nasdaq Riga at 85%. In 2019, FSIs remain the main issuer in Latvian corporate bond market (64% of the number of issues (Nasdaq Baltic, 2019)). The financing needs and preferences of the FSIs not only shape the segment profitability but also build Latvian corporate bond market sustainability. 
 Academic papers provide broad motivation for corporate debt issuing: an efficient competition to bank funding, long-term financing, improvement of the cash flow by decreasing the cost of debt, optimization of the financial structure, and efficient ownership structure. The existing academic research is modest on the analysis of the FSI segment as the issuer segment in the debt market where academics do analyse the corporate bonds issuance by the FSIs where motivating factors stimulating FSIs to come to the public debt market are seldom separated while size and characteristics of the issuers are mostly scrutinised.
 The aim of this article is to analyse the determinant of the development of the FSI segment of the corporate bond market in Latvia by defining the factors stimulating the bond issuing decision as made by the FSI segment. This article provides primary data analysis of both survey and in-depth interviews with Latvian FSI segment representatives run in the period June-August 2017. The results of the analysis indicate that bank borrowing is not treated as the funding alternative for FSIs where issuing debt and equity funding are the recognised funding sources of the FSI segment. The growing role of the peer-to-peer platform financing is recognised and will further influence the FSI segment alternative financing. The main factors motivating FSIs to come to the debt market are reputation a company gets as the result of the bond issue, strategical ambition to be present in the public market, cost of funding in the long-term (more than 3 years). The methods used in this article are scientific publication analysis, document analysis, expert survey, in-depth interviews, and statistical data analysis.

Credit supply and capital structure adjustments

AbstractUsing the staggered deregulation of the U.S. banking industry as a series of exogenous shocks, I study the effect of the credit supply on the speed of capital structure adjustment. I find robust evidence that interstate and intrastate banking deregulation are positively associated with leverage adjustments. Specifically, the speeds of adjustment to target leverage are faster in the postderegulation periods. I also find that the positive effect is driven by firms that are financially constrained, are financially dependent on banks, and have less access to the public debt market and by deregulated banks’ ability to geographically diversify the credit risk.

The effect of debt market imperfection on capital structure and investment: Evidence from the 2008 global financial crisis in Japan

This paper investigates how debt market frictions affect real firm behaviors such as capital structures and investments differently based on whether a firm has access to the public debt market, taking debt structure differences into account. To this aim, using the natural experimental approach to examine the 2008 credit supply shock in Japan, we show that firms without access to the public debt market face decreased leverage and investment, accompanied by decreased bank debt, compared to firms with access. Considering that firms without access to the public debt market are more dependent on banks for their debt and are likely to have closer relationships with banks than those with access, it is intriguing that bank-dependent firms face reduced debt supplies from banks compared to other firms. Moreover, through investigation of the regression of investments where the interaction term with different debt structures is introduced, it is suggested that differences in debt structure or debt maturity between firms with access to public debt and those without access also play an important role in determining debt and investment and that bank-dependent firms faced more underinvestment or uncertainty after the financial crisis of 2008 than firms with access to the public debt market.

Foreign Institutional Ownership and the Choice between Public and Private Debt

ABSTRACTThe objective of this study is to examine the role of foreign institutional investors (FIIs) in firms' choice of debt. Using a large sample of firms from 40 countries, we find that FIIs are positively associated with the propensity of firms to access the public debt market and the subsequent issuance of new public debt. In contrast, we find no relationship between domestic institutional ownership and public debt. Our results are robust to various specifications, including a 2SLS regression model, a change model, a Heckman two-stage model and propensity score matching model, and a quasi-natural experiment using the exogenous relaxation of foreign equity restrictiveness. Cross-sectional tests further show that findings are stronger for firms with poorer accruals quality, with higher levels of information asymmetry, and firms domiciled in countries with weaker creditor protection. Collectively, our findings suggest that FIIs play a vital role in facilitating firms' public debt financing.

Nonresident Capital Flows and Volatility

Malaysia’s local currency debt market is one of the most liquid public debt markets in the world. In recent years, the growing share of nonresident holders of debt has been a source of concern for policymakers as a reason behind exchange rate volatility. The paper provides an overview of the recent developments in the conventional debt market. It builds an empirical two-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it uses a GARCH model to test the hypothesis that nonresident flows are behind the observed exchange rate volatility. The results suggest that the public debt market in Malaysia responds adequately to both pull and push factors and find no firm evidence that nonresident flows cause volatility in the onshore foreign exchange market.

Changes in the Effects of Bank Lending Shocks and Development of Public Debt Markets

This paper investigates whether the effect of bank lending shocks has changed over time using a sign-restriction Vector Autoregression approach. To the extent to which the effect of bank lending shocks depends critically on firms’ ability to access alternative sources of financing, the rapid development in public debt markets from the 1980s might have weakened this effect. Indeed, we confirm that the effect of bank lending shocks on output has decreased significantly since the 1980s. Consistent with the financial innovation-based explanation of such reduced effects of bank lending shocks, we find that their effects on corporate bond markets have substantially changed as well. These changes in the substitutability between loans and bonds via financial innovation are key to understanding the reduced effect of bank lending shocks. Supporting our identifying assumptions regarding firms’ ability to access alternative sources of financing, the substantial decline in the effects of bank lending shocks is only observed on investment, not consumption.

Nonresident Capital Flows and Volatility: Evidence from Malaysia's Local Currency Bond Market

Malaysia’s local currency debt market is one of the most liquid public debt markets in the world. In recent years, the growing share of nonresident holders of debt has been a source of concern for policymakers as a reason behind exchange rate volatility. The paper provides an overview of the recent developments in the conventional debt market. It builds an empirical two-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it uses a GARCH model to test the hypothesis that nonresident flows are behind the observed exchange rate volatility. The results suggest that the public debt market in Malaysia responds adequately to both pull and push factors and find no firm evidence that nonresident flows cause volatility in the onshore foreign exchange market.

Private Credit Under Political Influence: Evidence from France

Formally independent private banks change their supply of credit to the corporate sector for the constituencies of contested political incumbents in order to improve their reelection prospects. In return, politicians grant such banks access to the profitable market for loans to local public entities among their constituencies. We examine French credit registry data for 2007--2017 and find that credit granted to the private sector increases by 9%--14% in the year during which a powerful incumbent faces a contested election. In line with politicians returning the favor, banks that grant more credit to private firms in election years gain market share in the local public entity debt market after the election is held. Thus we establish that, if politicians can control the allocation of rents, then formal independence does not ensure the private sector's effective independence from politically motivated distortions.

Regresión cuantílica dinámica para la medición del valor en riesgo: Una aplicación a datos colombianos.

En este documento se estima el valor en riesgo (VaR) utilizando métodos semiparamétricos basados en regresión cuantílica lineal y no lineal. En particular, se usan varias especificaciones de la familia de modelos CAViaR. Estos modelos permiten capturar hechos estilizados de las series financieras y evitan imponer supuestos relacionados con la distribución de los activos financieros. Adicionalmente, estas metodologías son comparadas con técnicas de VaR tradicionales para la tasa de cambio representativa del mercado, un índice de precios de bonos de deuda pública, y el índice de la bolsa de valores de Colombia, durante el periodo comprendido entre diciembre de 2007 y noviembre de 2015 . En general, se encontró que las medidas de riesgo de mercado bajo estas metodologías tienen un mejor desempeño respecto a las tradicionales.

REGRESIÓN CUANTÍLICA DINÁMICA PARA LA MEDICIÓN DEL VALOR EN RIESGO: UNA APLICACIÓN A DATOS COLOMBIANOS

This document contains the results for the estimation of Value at Risk (VaR) based on linear and non-linear quantile regression techniques. In particular, several CAViaR (conditional autoregressive value at risk) models are implemented for this purpose. These models can replicate the empirical properties of asset returns without requiring distributional assumptions. In addition, these methods are compared with traditional VaR techniques for the Colombian peso exchange rate, a public debt market price index, and the Colombian stock price index, during the periods of December 2007 and November 2015. In general, the quantile regression-based techniques show a good performance with respect to the traditional models.

Does Corporate Social Responsibility Facilitate Public Debt Financing?

This study investigates debt market benefit of socially responsible firms. We find that better CSR performance increases the share of public debt to total debt. Such effect is stronger for firms facing high agency and information costs, confirming that CSR drives debt structure by mitigating these frictions. The effect of CSR is weaker for firms in sinful industries or in low-trust regions where CSR is likely to be viewed as window dressing. Furthermore, utilizing BP oil spill event, we document that the effect of CSR becomes stronger after this event but only for non-sinful firms. This finding indicates that investors seem to value CSR more after a severe environmental disaster only for non-sinful firms, and they still perceive CSR as window dressing for sinful firms. Our evidence survives endogeneity checks and suggests that CSR facilitates firms’ access to public debt market especially when CSR is perceived as a genuine commitment.

Evolution and Prospects of the Federal Loan Bonds Market Development

The government securities market is the most crucial element of the financial market in any country that plays an important role in funding of public expenditures and development of the national economy. At present, government securities make up more than 70 % of the internal public debt of the Russian Federation and more than 90 % of the public debt in bonds are federal bonds. Changes in the market of federal loan bonds that took place in 2011-2017 are described in the paper. Trend data characterizing the market and where it belongs to in the structure of the internal public debt of the Russian Federation are analyzed. The paper shows how macroeconomic indicators, debt policy of the country, demand for federal loan bonds, including that by foreign investors, influence development of the public debt market and creation of new types of market instruments. The authors also examine prospects of the federal loan bonds market and the expected trends in its development.

Intra-industry transfer effects of credit risk news: Rated versus unrated rivals

We examine the information transfer effect of bond-rating adjustments on industry rivals. Our research is based on the premise that the transfer effect is influenced by the rated status of rivals, i.e., whether the rival’s debt is rated by any credit rating agency. The results reveal that credit rating adjustments induce different/stronger effects. First, the intra-industry transfer effects (on returns and risk) are stronger on rated rivals than on unrated rivals. Second, the credit risk news produces lower co-movements between the returns of the two types of rivals. Third, the differential effect is stronger in the manufacturing industry, in the riskiest industries and in the industries with the lowest competition levels. Interestingly, our results suggest that credit rating news is more relevant for rivals with access to the public debt market (such as re-rated firms) than for rivals that focus on other sources of funding.

Política monetaria hondureña en un entorno de liberalización financiera y mercado bancario oligopólico

El objetivo de este artículo es ofrecer un análisis crítico de las dificultades para gestionar la política monetaria hondureña tras la liberalización financiera iniciada en 1990, que para la gestión de la liquidez del sistema financiero demanda un mercado de préstamos entre bancos con garantía o colateral (reportos), entre otros requisitos. El estudio encontró que la autoridad monetaria ha cumplido con su objetivo de control de la inflación, pero la estructura oligopólica del mercado bancario no ha facilitado un mejor avance en la formación del necesario mercado de deuda y el costo de las emisiones. También los datos parecen sugerir ¿que la tasa referencial solo es uno de los determinantes para la fijación del resto de tasas del sistema financiero. Otro de los resultados muestra la tendencia a invertir una proporción significativa de las obligaciones bancarias en valores gubernamentales. El estudio sugiere la necesidad de formular y ejecutar una política monetaria anti-especulación.

Does short-maturity debt discipline managers? Evidence from cash-rich firms' acquisition decisions

We study the disciplinary role of short-maturity debt in cash-rich firms. We report evidence that such debt mitigates cash-rich firms' overinvestment in acquisitions. The disciplinary role is mostly concentrated among cash-rich firms that are weakly governed and have limited access to the public debt market and is also more pronounced for cash-rich firms that operate in less competitive industries. Furthermore, for cash-rich acquirers, high levels of short-maturity debt are associated with higher acquisition announcement returns and better post-acquisition operating performance. Overall, our results highlight the effective role of short-maturity debt in reducing agency cost.

Investor tastes: Implications for asset pricing in the public debt market

Some firms create innovative financial debt and equity products to attract specific investor tastes (i.e., non-monetary preferences unrelated to expected cash flows). Innovations can be costly, but they may also widen a firm's investor base, leading to a reduction in the cost of capital. Prior research is inconclusive about whether tailoring financial products to meet specific investor tastes affects asset pricing, which I posit stems from a lack of consensus on which assets satisfy a particular taste. My research design, however, avoids this ambiguity by testing the relation between asset pricing and an objectively identified investor taste—a taste for Shariah-compliant investments, which is satisfied via Islamic Finance. Using Malaysian data, I estimate price differences between conventional and Shariah-compliant bonds over an eight-year period (2005 to 2013). I find that an investor taste for Shariah-compliant bonds significantly affects bond pricing. These results hold even after controlling for issuer and issuance characteristics, including differences in covenant types, as well as the possibility that price and demand may be simultaneously determined. I also find evidence that investors with a taste for Shariah-compliant bonds have a significantly different demand distribution than investors without this taste, corroborating my assertion that a preference for Shariah-compliant investments is a distinct taste. Overall, my results are consistent with investors taste affecting the cost of capital.