Short-term Borrowing Research Articles

Effect of SEC’s Proposed Short-term Borrowing Disclosure Regulation on U.S. Stock Prices

This study examines the market reaction to proposed short-term borrowing disclosure regulations and documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of investors. The 2008 financial crisis, triggered in part by excessive bank borrowing, led to the failure of a number of major financial institutions, including one U.S. investment bank, Lehman Brothers. Investigating the reasons for Lehman’s failure, the bankruptcy examiner determined in March 2010 that the bank had improperly moved $50 billion off its balance sheet by misclassifying short-term trades as sales. This, and similar window-dressing at other major banks, precipitated a Securities and Exchange Commission (SEC) inquiry. In April 2010, the SEC informed Congress that it was considering new rules to discourage financial firms from reducing borrowing in anticipation of their quarter-end reports. Subsequently, in September 2010, the SEC unanimously voted for a proposed “Short-Term Borrowing Disclosure Rule” requiring additional quantitative and qualitative disclosure about short-term borrowing, with the primary objective of improving investors’ understanding of reported amounts of short-term borrowing. The rule would apply to all SEC registrants, with most disclosure required of Int Adv Econ Res (2012) 18:461–463 DOI 10.1007/s11294-012-9371-2

Comment on “Korea's Growth Performance: Past and Future”

Korea’s growth track record is truly extraordinary by any measure. It is not easy to explore Korea’s astounding development trajectory amidst the many obstacles that stood in its way or to gaze into the crystal ball for a glimpse of its future, given the numerous challenges and uncertainties that stare in its face. Noland (2012) has skilfully carried out this task. His excellent analysis bears testimony to his deep understanding of Korea’s history, psyche, and growth strategy. Korea’s growth model was by no means seamless. In fact, Korea had its own share of mistakes which resulted in hyperinflation, an overvalued currency, unbridled cronyism, rent seeking, etc. Indeed, developing countries have much to learn from Korea’s failures as much as from its successes. The lack of natural resources was a blessing in disguise for Korea, which ensured that Korea could not slip into complacency or fall into the clutches of the Dutch disease. Korea was good at transforming obstacles into opportunities, turning a resource-scarce economy into a resourceful one. Japan was Korea’s role model, which was also the case for Taiwan and Singapore, given the common denominator of a lack of natural resources, although their growth strategies were markedly different, especially with respect to the role of conglomerates as opposed to small and medium enterprises and the role of foreign direct investment versus homegrown investment. In a sense, Korea’s development model was a carbon copy of Japan’s, withchaebols as its counterparts for Japan’szaibatsus, based on government patronage and driven by domestic investment. The Korean economy grew on the coattails of the USA during the Cold War. Had it not been for the rapid expansion of the US economy with fairly liberal market access, Korea could not have leapfrogged to where it stands today. While Japan was a source of inspiration cum peer pressure for Korea, it is to the USA that Korea owes the most. This observation is highly pertinent not only for explaining the meteoric rise of Korea thus far, but also for understanding its future challenges. Korea’s policy missteps, too, provide valuable lessons for other economies, to avoid costly mistakes, which include such practices as “picking winners,” price distortions, short-term borrowing for long-term investment, high levels of financial leverage, and an unholy trinity among the state, businesses, and banks. All these had arguably led to poor governance which culminated in a major financial crisis in 1997. Be that as it may, credit

Redefining the Money Market

The money market has traditionally been defined as the market for marketable short-term securities. It has deep historical roots. Today, it is not an illuminating definition. The genesis of interest rates, which is the quintessence of monetary policy implementation, does not originate in market for marketable short-term securities. It is found in the non-marketable interbank debt market, and spreads out from there. Therefore, the logical starting point in defining the money market is that it embraces all short-term lending and borrowing, direct and indirect via the financial intermediaries. In addition, money creation, that is, new bank lending and its corollary bank deposit creation, is firmly in the province on the money market. Given these, we offer an alternative definition of the money market.

Control of Finance as a Prerequisite for Successful Monetary Policy: A Reinterpretation of Henry Simons’s 'Rules Versus Authorities in Monetary Policy'

Henry Simons’s 1936 article “Rules versus Authorities in Monetary Policy” is a classical reference in the literature on central bank independence and rule-based policy. A closer reading of the article reveals a more nuanced policy prescription, with significant emphasis on the need to control short-term borrowing; bank credit is seen as highly unstable, and price level controls, in Simons’s view, are not be possible without limiting banks’ ability to create money by extending loans. These elements of Simons’s theory of money form the basis for Hyman P. Minsky’s financial instability hypothesis. This should not come as a surprise, as Simons was Minsky’s teacher at the University of Chicago in the late 1930s. I review the similarities between their theories of financial instability and the relevance of their work for the current discussion of macroprudential tools and the conduct of monetary policy. According to Minsky and Simons, control of finance is a prerequisite for successful monetary policy and economic stabilization.

Does the IMF's Official Support Affect Sovereign Bond Maturities?

This paper looks at whether the tendency of some governments to borrow short term is reinforced by financial support from the International Monetary Fund. I first present a model of sovereign debt issuance at various maturities featuring endogenous liquidity crises and maturity mismatches due to financial underdevelopment. I use the model to analyze the impact of IMF lending during debt crises on the sovereign’s optimal maturity structure. Within the model, although IMF assistance is able to catalyze private flows, this provides incentives for government to issue larger amounts of short-term debt, making the roll-over problem larger. I take the model to the data and find support for the hypothesis that IMF lending leads countries to increase their short-term borrowing. Additionally, I do not find any positive effect of IMF lending on countries’ ability to tap international capital markets. These results helps explain why a catalytic effect of IMF lending has proved empirically elusive.

Does the IMF's Official Support Affect Sovereign Bonds Maturities?

This paper looks at whether the tendency of some governments to borrow short term is reinforced by financial support from the International Monetary Fund. I first present a model of sovereign debt issuance at various maturities featuring endogenous liquidity crises and maturity mismatches due to financial under-development. I use the model to analyse the impact of IMF lending during debt crises on the sovereign’s optimal maturity structure. Within the model, although IMF assistance is able to catalyse private flows, this provides incentives for government to issue larger amounts of short-term debt, making the roll-over problem larger. I take the model to the data and find support for the hypothesis that IMF lending leads countries to increase their short-term borrowing. Additionally, I do not find any positive effect of IMF lending on countries’ ability to tap international capital markets. These results help explain why a catalytic effect of IMF lending has proved empirically

Optimal Monetary Policy, the Zero Bound and the Term Structure of Interest Rates

Optimal Monetary Policy, the Zero Bound and the Term Structure of Interest Rates

The importance of working capital management for hospital profitability

Increased financial pressures on hospitals have elevated the importance of working capital management, that is, the management of current assets and current liabilities, for hospitals' profitability. Efficient working capital management allows hospitals to reduce their holdings of current assets, such as inventory and accounts receivable, which earn no interest income and require financing with short-term debt. The resulting cash inflows can be reinvested in interest-bearing financial instruments or used to reduce short-term borrowing, thus improving the profitability of the organization. This study examines the relationship between hospitals' profitability and their performance at managing two components of working capital: accounts receivable, measured in terms of hospitals' average collection periods, and accounts payable, measured in terms of hospitals' average payment periods. Panel data derived from audited financial statements for 1,397 bond-issuing, not-for-profit U.S. hospitals for 2000-2007 were analyzed using hospital-level fixed-effects regression analysis. The results show a negative relationship between hospitals' average collection period and profitability. That is, hospitals that collected on their patient revenue faster reported higher profit margins than did hospitals that have larger balances of accounts receivable outstanding. We also found a negative relationship between hospitals' average payment period and their profitability. Hospital managers did not appear to delay paying their vendors. Rather, the findings indicated that more profitable hospitals paid their suppliers faster, possibly to avoid high effective interest rates on outstanding accounts payable, whereas less profitable hospitals waited longer to pay their bills. The findings of this study suggest that working capital management indeed matters for hospitals' profitability. Efforts aimed at reducing large balances in both accounts receivable and accounts payable may frequently be worthwhile investments that have the potential to reduce the costs associated with working capital management and thus improve the profitability of an organization.

Lehman on the Brink of Bankruptcy: A Case about Aggressive Application of Accounting Standards

ABSTRACT In September 2008, Lehman became the largest company in U.S. history to file for bankruptcy. Nine months earlier, Lehman had reported record revenue and earnings for 2007, and had started the year with a market capitalization of over $30 billion. Lehman's precipitous fall has been attributed to a high-risk business strategy and to aggressive interpretation of accounting rules. Lehman was both a victim of—and an important contributor to—the worst U.S. economic recession since the Great Depression, and the firm's accounting choices warrant scrutiny. This case is structured around collateralized short-term borrowings, commonly used by financial institutions, called repurchase agreements. Lehman modified the terms of the standard agreement and used an aggressive interpretation of SFAS No. 140 to account for these modified agreements as a sale of the collateral. These transactions, called Repo 105s, affected the firm's reported financial position. The case requires students to evaluate those effects, interpret financial ratios, critically read authoritative accounting literature, and consider important questions about auditors' responsibilities. Key issues include the relative merits of principles-based versus rules-based accounting standards, corporate governance, ethics, materiality, and whistleblowing.

Does Finance Play a Role in Exporting for Service Firms? Evidence from India

AbstractThe importance of finance for exporting goods is well understood in the literature. Yet, despite the growing magnitude and importance of service exports, the question whether service firms rely on external finance for exporting remains unanswered by the existing literature. We address this overlooked area by studying whether long‐ and short‐term borrowing matters for the exporting decisions and the levels exported by Indian service firms. To this end, we use an unbalanced panel of service firms for the years 1999–2007 from the Prowess data set compiled by the Centre for Monitoring the Indian Economy. In contrast to some findings for the manufacturing industry, we found that finance is not a significant determinant of Indian service firms' exporting activity. Possibly, the different nature of costs associated with the exports of services restrains the impact of finance on exporting. Interestingly, in line with previous research on goods exports, we found that some nonfinancial variables such as firm size, total factor productivity and technology investments are significant factors motivating the exporting decision and the level of exports of Indian service firms.

Comment on “Chiang Mai Initiative Multilateralization: Origin, Development, and Outlook”

Comment on “Chiang Mai Initiative Multilateralization: Origin, Development, and Outlook”

Corporate Liquidity and Capital Structure

We solve for a firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing, and equity issues as controls assuming mean reversion of earnings. Optimal cash is non-monotone in business conditions and increasing in the level of long-term debt. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to changes in the level of long-term debt. The model has interesting implications for asset substitution, hedging, and pecking order. Growth opportunities do not greatly affect cash holding policy.

Libor manipulation?

On May 29, 2008 the Wall Street Journal published an article alleging that several global banks were reporting Libor quotes significantly lower than those implied by prevailing credit default swap (CDS) spreads. While acknowledging that the “analysis doesn’t prove that banks are lying or manipulating Libor,” it nevertheless conjectures that these banks may “have been low-balling their borrowing rates to avoid looking desperate for cash.” In this paper we compare Libor with other short-term borrowing rates, analyze individual bank quotes, and compare these individual quotes to CDS spreads and market capitalization data during three periods: 1/1/07–8/8/07 (Period 1), 8/9/07–4/16/08 (Period 2), and 4/17/08–5/30/08 (Period 3). We find some anomalous individual quotes, but the evidence is inconsistent with a material manipulation of the US dollar 1-month Libor rate.

Window Dressing of Short-Term Borrowings

We investigate the extent to which banks’ quarter-end borrowings in the repurchase market deviate from within-quarter levels, and associated factors. Quarter-end repo liabilities are materially lower than within-quarter averages for a large fraction of sample banks. These deviations are more pronounced at banks with a higher concentration of repo borrowings in their liability structure and with larger absolute trading gains or losses. Furthermore, the association with trading activity is mitigated when banks are better capitalized. We also find that these deviations are associated with bank depositor and borrower behavior. Together, the evidence suggests that deviations reflect both active window dressing and passive customer-driven liquidity dynamics. We document that unexpected downward quarter-end deviations in repo liabilities are associated with adverse short-term capital market consequences. Over the long term, banks with more frequent downward quarter-end deviations exhibit higher credit risk, but we find mixed evidence for equity market valuation multiples.

A Study of Financing Behavior of Japanese Firms with Firm-Level Data from Corporate Enterprise Quarterly Statistics - 1994-2009: Introduction and Summary

From early spring to late summer in 2010 I investigated the financing behavior of Japanese firms with over 10 million in paid-in capital, using firm-level financial data from Hojin Kigyo Tokei Kiho (Corporate Enterprise Quarterly Statistics) of the Ministry of Finance. “A Study of Financing Behavior of Japanese Firms with Firm-Level Data from Corporate Enterprise Quarterly Statistics - 1994~2009”, divided into five discussion papers, constitutes the report. This Introduction and Summary forms the first of the five papers. The other four papers are:[I]. The Low “Bank-Dependence Ratio” and the Further Increase in the “Independence of Firms from Banks”.[II]. The Reality of Short-term Shocks like the “Credit Crunch” of 1997-1999 and the “Financial Crisis” of 2007, and the Effectiveness of “Emergency” Economic Measures – A Follow-up to Miwa [2008].[III]. The Reality of Trade Credit and its Link to Bank Borrowing and Inventory: (1) Overall Discussion and Preliminary Investigation.[IV]. The Reality of Trade Credit and its Link to Bank Borrowing and Inventory: (2) Correlation Coefficients and Multiple Regressions. This Statistics collects quarterly financial data from about 20,000 randomly sampled non-financial firms in 5 size-categories, most of which are unlisted small businesses. Using firm-level data in 1994-2009, I investigate the financing behavior of the firms in Japan during “the Lost Two Decades.” I explore the reality of the “Credit Crunch” of 1997-1999 and the “Financial Crisis” of 2007, the effectiveness of the policy measures adopted, and the effect of the “zero-interest-rate, quantity easing” monetary policy. The most surprising finding is that the ratio of zero-short-term-borrowing was the highest, 50% in 1998 and two-thirds in 2008, among the smallest firms. The average (short-term bank borrowing)/(total asset) ratio was also lowest among this group. This “Independence from Banks” is a fundamental challenge to the basic premise of the conventional wisdom about the Japanese financial market and corporate finance.

A Suggested New Approach to the Measurement and Reporting of Gross Short- Term Borrowing Operations by Governments

As part of its Borrowing Outlook, the OECD estimates gross short– term government borrowing requirements. The article concludes that all methods for measuring short-term borrowing needs studied here – except one – provide either significantly underestimated or substantially overestimated measures. The article therefore suggests adopting the following measure: Gross Short-Term Marketable Borrowing Requirements is equal to Net Short-Term Borrowing Requirements plus the outstanding amount of the stock of short-term instruments. This new measure (referred to as Method 2 in the study) yields, in principle, meaningful estimates, comparable across different countries. JEL Classification: G15, G18, H63, H68. Keywords: measuring gross short-term borrowing requirements, debt

FINANCIALLY OPTIMAL INVENTORY POLICIES WITH NON-LINEAR REPLENISHMENT COSTS

We model the inventory decisions of a firm that maximizes its market value, namely, the expected present value of the time stream of dividends issued to its shareholders. The firm is single-product and equity-owned, it orders products from an outside supplier, its only short-term borrowing is for solvency if necessary, and it issues dividends to its shareholders while facing financial and market risks (uncertain demand). The distinguishing features of the model are the financial criterion, hence joint selection of operational and financial decisions, and non-linear replenishment costs. If the non-linearity is due to a setup cost, we show that an (s, S) replenishment policy is optimal. The analysis is not a straightforward variant of Scarf's argument. If the non-linearity is due to bilinear smoothing costs, we show that the optimal replenishment policy has the same form as in the traditional smoothing cost model. These seem to be the first instances in which the optimization of a model with a financial criterion and non-linear replenishment costs yields policies having the same forms as in the corresponding cost minimization problems.

Capital Structure Under Heterogeneous Beliefs

We develop a structural model to quantitatively analyze the effects of asymmetric beliefs and agency conflicts on capital structure. Capital structure reflects the dynamic tradeoff between the positive incentive effects of managerial optimism and the negative effects of risk-sharing costs. Consistent with empirical evidence, long-term debt declines with optimism, while short-term borrowing increases. Permanent and transitory risk components have contrasting effects. Long-term debt increases with the intrinsic risk, but varies non-monotonically with the transient risk. Short-term borrowing declines with the intrinsic risk, but increases with the transient risk. Overall, our findings show that asymmetric beliefs significantly influence firms' financial policies.

Parental income, assets, borrowing constraints and children's post-secondary education

This study is a test of two theoretical models linking parental economic resources to children's post-secondary education, short-term borrowing constraints, and long-term family background. A series of structural equation models (SEM) is tested using data from a sample of young adults ( N = 650) in the Panel Study of Income Dynamics (PSID). To further understand the role of parental resources in children's education, analyses are conducted for both income and assets, with assets measured by liquid assets and net worth. Findings indicate that both income and assets have consistent long-term associations with children's college entry. When measures of household wealth are incorporated in the analysis, the hypothesis of short-term borrowing constraints is also supported. Implications for research and policy are considered.

Firms' investment under financial constraints: a euro area investigation

In this article we describe a model of optimal investment of various types of financially constrained firms. We show that the resulting relationship between internal funds and investment is nonmonotonic. In particular, the magnitude of Cash Flow (CF) sensitivity of the investment is lower for the firms with credit rationing compared to the firms that are able to obtain short-term external financing. The inverse relationship is driven by the leverage multiplier effect. A positive CF shock increases the short-term borrowing capacity of the firm, which in turn has a positive effect on investment and the firm's growth. Moreover, the leverage multiplier effect is the highest for firms relying on short-term credits and it is lower for firms that are able to obtain long-term financing. Analysing a large euro area data set we find strong empirical support for our theoretical predictions. The results also help to explain some contrasting findings in the financial constraints literature.