Traditional Debt Research Articles

Transformative Dynamics in Private Equity: Exploring Co-investment, ESG Integration and Digitalization Strategies

This paper delves into the evolving landscape of private equity (PE) financing, particularly in the context of the real estate and project development sectors amidst global economic fluctuations and geopolitical uncertainties. With traditional debt financing losing its sheen, the study focuses on the burgeoning role of PE, especially co-investment funds, as a viable financial alternative. Utilizing a rich dataset from reputable sources such as Morningstar, Pitchbook, and the European Central Bank, along with other pertinent studies, the paper presents a nuanced analysis of the declining PE transaction activity in 2023. It highlights how this downturn has catalyzed the adoption of innovative strategies, including the rise of “continuation vehicles” and the increasing significance of co-investments. Moreover, the research offers an insightful examination of the German SME sector, showcasing how PE can be a transformative force. It particularly emphasizes the incorporation of ESG (environmental, social, and governance) considerations and the advancement of digitalization within these enterprises. The study employs a mixed-methods approach, blending qualitative insights with a robust collection of both primary and secondary data. It argues that PE is not merely a financial instrument but a catalyst for meaningful business evolution, enabling German SMEs to effectively respond to current market challenges and undergo essential transformations. This paper aims to contribute to the broader understanding of PE’s role in contemporary business environments, offering valuable perspectives for academics, industry practitioners, and policymakers.

Exploring the relationship between investors' financial literacy and advisor use with securities‐based loans

AbstractPast literature has explored the characteristics of individuals who use high‐interest and tax‐inefficient consumer debt products, such as carrying a monthly credit card balance and engaging with alternative financial services. That literature revealed that users of these debt products tended to be financially constrained households faced with an immediate liquidity need, and that they had lower levels of financial literacy. Much less is known, however, about the role financial literacy may play when a more advantageous solution may be available but not used—an example of which is securities‐based loans, which offer lower rates and potential tax preferences. Therefore, this study used the 2018 National Financial Capability Study to examine why investors use traditional debt products when they could likely have qualified for a securities‐based loan. Using bounded rationality as a theoretical framework, this research advances the literature in consumer debt and borrowing decisions. The results found that objective knowledge, as opposed to self‐assessed ability or confidence, explained the use of optimal debt products. Additionally, advisor engagement was positively associated with securities‐based loan use.

Fiscal Space Policies for Sustainable Development and Debt Relief: Empirical Analysis in West African Countries

Abstract The uncertainty that the COVID-19 pandemic has brought demonstrates that income redistribution and traditional debt relief mechanisms are insufficient to meet public spending needs, mitigate external debt, and comply with the UN’s Sustainable Development Goals (SDGs), which aim to reduce multilateral debt to sustainable levels. Also, West African countries have focused their attention on the long-term fight against poverty and inequality and strengthening their social programs, especially in primary health care and macroeconomic stability. However, for more than a decade, the developing and least developed countries of West Africa have faced rapidly weakening macroeconomic conditions, combining several interrelated crises such as the sharp decline in oil prices, volatile financial markets and tourism disruptions, a global recession, the crisis of climate change, and shortages of food and energy, along with the economic contraction of COVID-19. Data from these countries show that health spending increases economic growth, minimizes infant mortality rates, and reduces debt. Furthermore, increasing government spending efficiency reduces the total debt and improves the health sector, in particular.

A balance‐sheet approach to fiscal sustainability

AbstractThis paper proposes an alternative methodology to assess fiscal sustainability. Our balance‐sheet approach (BSA) relies on estimating separately all of a government's assets and liabilities as opposed to focusing only on the burden of explicit liabilities. In our approach, assets are primarily the present discounted value of taxes, and liabilities include explicit liabilities but also the present discounted value of expenditures. Using the value of assets and liabilities, we compute the government's balance sheet, and therefore net worth. We then evaluate the response of net worth to growth, commodity prices or real exchange rate shocks. By computing a value for the government's net worth, our methodology allows an assessment of fiscal sustainability that is less reliant on the analyst's assumptions than traditional debt sustainability analysis (DSA).

Debt Renegotiations Outside Distress

Abstract This article develops a model to explore the implications of nondistressed debt renegotiation on debt prices and corporate policies. The model incorporates the empirical observation that creditors can influence firms also outside corporate distress through debt covenant renegotiation and not only in distress. We find that considering both distressed and nondistressed creditor interventions is key to investigating how creditor governance affects firms. The model explains cross-sectional patterns of control premiums and credit spreads that traditional debt renegotiation models do not capture. We also derive novel implications for the impact of firm characteristics associated with renegotiation on debt prices and corporate policies.

Messages Committing You to Reciprocate

The article presents the results of a field experiment that uses ‘nudge’ type influences as the content of text messages targeting a specific group of debtors of one of the fast loans company’s operating in Bulgaria. This is a group consisting of so-called ‘contactless’ clients, the ones that stop paying their instalments and cut all the communication with their creditor during the COVID 19 isolation phase. We define the term nudge and also explain the differences between the traditional debt collection process and the behavioural approach to collection. We reveal the impact of nudging sms messages that make debtors feel committed to reciprocate, which is a specific automatic effect on the decision-making process. Those text messages significantly increased the probability of the debtors responding to the invitation for credit restructuring, compared to when the standard message was sent. Therefore, it is important to implement new behavioural approaches in existing debt collection strategies in the context of the new social reality created by the COVID-19 pandemic.

Theories of Crowdfunding and Token Issues: A Review

Entrepreneurial, innovative and small- and medium-sized firms experience difficulties with raising funds using traditional debt and equity. Consequently, they are constantly looking for new strategies of financing. The latest inventions are crowdfunding and token issues. In contrast to traditional ways of raising funds these innovations: (1) use modern technology (online transactions, blockchain, etc.) much more actively; (2) are usually quicker in reaching potential investors/funders; (3) use more active network benefits such as, for example, a large number of interactions between investors/funders and between funders and firms. These changes are so significant that some experts list them among the top business inventions of the 21st century. This article provides a review of the growing number of theoretical papers in the areas of crowdfunding and token issues, compares their findings with empirical evidence and discusses directions for future research. The research shows that a large gap exists between the theoretical literature and empirical literature.

Over-indebtedness, mastery and mental health: a cross-sectional study among over-indebted adults in Switzerland.

The aim is to investigate whether and why over-indebted individuals in German-speaking Switzerland have poorer mental health than the general population. A cross-sectional study among over-indebted people in the canton of Zurich was conducted in 2019. The study population (n = 219) was compared to the cantonal subsample of the general adult population selected from the nationally representative sample of the Swiss Health Survey 2017 (n = 1,997). Bivariate and multivariate statistical analyses were used to examine associations between over-indebtedness, mastery and health outcomes like mental stress and depression. Over-indebted people have poorer mental health and weaker mastery than the general population. Low mastery is the strongest predictor of poor mental health (beta coefficient = 0.58/-0.62 for mental stress/depression respectively) among the over-indebted, followed by the perception of one's health being affected by over-indebtedness (beta coefficient = -0.19/0.15). The amount of debt, anticipated time until repayment of debt and duration of indebtedness had no predictive effects. Surprisingly, traditional debt parameters cannot explain the poor mental health of the over-indebted, in contrast to a strong sense of mastery, which was identified as a highly protective factor.

Financing Options and Sustainable Small Business Growth in Uganda: An Optimal Model

Small businesses in Uganda continue to lag behind trends in terms of sales turnover profitability, employee growth, while others rarely live to celebrate their first birthday due to various constraints of which financing is at the forefront. This study set out to determine the relationship between various financing options and sustainable small business growth so as to suggest an optimal financing model to ensure sustainable small businesses. The study adopted a cross-sectional descriptive survey design to analyse a sample of 399 small businesses which were selected using stratified random sampling from Kampala Metropolitan Area. Data were collected using a researcher administered structured questionnaire and analysed using descriptive statistics. The relationship between the variables was determined using Spearman’s rank correlation coefficeint. The study established that there is a weak positive significant correlation between traditional debt finance and sustainable small business growth, a strong positive significant correlation between asset-based finance and sustainable small business growth, and a strong positive significant correlation between crowdfunding and sustainable small business growth. The study further established that there is a moderate positive significant relationship between equity finance and sustainable small business growth. The study concluded that improving on the available financing options would improve on the sustainable small business growth. It is recommended that the ideal model for financing small businesses should be the integration of the financing options, but giving priority to; asset based lending, crowdfunding, equity finance and lastly traditional debt finance.

Corporate Finance and Firm Pollution

We find that firms release more toxics to the environment after they issue debt. The causal effect of debt financing on corporate pollution is supported by multiple identification strategies including the branching law change and the introduction of credit default swaps. The effect of credit on pollution is more pronounced for firms under greater debt repayment pressure, especially from bank lenders. We also show that green banks help curb pollution as the credit-pollution relationship is weaker for firms borrowing from green banks. Overall, our findings suggest that traditional debt usage is associated with a higher pollution level. Firms may sacrifice the environment to generate short-term profits to repay their debt. Environment-friendly financial instruments such as green loans or green bonds can be useful to curb pollution.

COLUMBIA BUSINESS SCHOOL ROUNDTABLE ON Broken Models of Public Finance

Joe Biden's chief economic adviser joins a proactive investor who was one of the largest private investors in Greek government bonds in dispelling a number of widespread misconceptions about public finance and sovereign debt, with particular focus on the inadequacies of the conventional measures used by politicians, the media, and even many economists when assessing the financial performance and condition of national governments. After describing the limitations of the “traditional debt and deficit model,” Paul B. Kazarian proposes the use of an alternative called Public Financial Management, or “PFM,” that has been implemented in New Zealand, the U.K. and 12 other countries. Such a model aims to provide a general government total balance sheet (federal, state, and local governments) that reflects all government assets and liabilities. And when using PFM, one finds, for example, that New Zealand is consistently ranked first or second in the world on Government Total Net Worth as percentage of GDP and Citizens' Wealth (CW1), whereas the U.S. falls well below the top tier.Jared Bernstein, on the other hand, is much less concerned by the understatement of U.S. debt and other liabilities than by the failure of conventionally reported U.S. debt and spending statistics to distinguish between “good” and “bad” debt, and between positive‐ and negative‐NPV public expenditures. While conceding that U.S. unfunded liabilities “sound very scary,” Bernstein points out that financial markets seem relatively unconcerned, if only because these future costs and liabilities are estimated on the basis of current law and practices, and sovereign governments, to a far greater extent than private corporations, have the power to limit liabilities or increase projected revenues just by reducing benefits or imposing or raising taxes.

Terms of Endearment: Financing Terms for Deep Technology Startups on a Crowdfunding Platform

Public science firms generate positive outcomes, but transitions for their private startup counterparts across the so-called ``Valley of Death'' remain challenging. Like other new ventures, they use modern tools to raise capital, such as crowdfunding and simplified convertible debt instruments, but these strategies have been poorly studied for the economically important niche of early-stage science firms. New data from a ``deep technology'' equity crowdfunding (EC) platform show that those investors make different decisions than their offline counterparts. Debt and a related instrument, the Simple Agreement for Future Equity (SAFE), are used successfully in both channels as early-stage vehicles, but selection and funding outcomes differ. Relative to life sciences and data sciences, engineering or hardware firms experience a significant penalty if they elect to offer convertible debt instruments. Equity crowdfunding investors strongly prefer the SAFE to a traditional debt instrument, but are relatively insensitive to the specific terms. These findings impact the understanding of entrepreneurial finance and the policy associated with science-based ventures.

(Debt) Overhang: Evidence from Resource Extraction

AbstractI study the empirical importance of debt overhang using a unique data set on resource extraction firms that provides ex ante measures of investment opportunities and important variation in terms of a firm’s obligations. In particular, unsecured reclamation liabilities create overhang that is costly to resolve and induces firms to forgo and postpone positive NPV investments. Traditional debt, in contrast, imposes few overhang-related investment distortions. These results show that (a) the overhang problem is potentially large and more broadly applies to firms’ nondebt liabilities and (b) overhang problems associated with traditional debt can be avoided through contracting and debt composition.

Somalia

This paper presents an assessment of Somalia’s eligibility for assistance under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. The macroeconomic framework reflects the policy framework underlying the proposed three-year Fund-supported program. The debt relief analysis (DRA) remains largely unchanged, but some of the underlying debt data has been updated to reflect new information from creditors. In addition, this paper presents an assessment of debt management capacity in Somalia and a full Debt Sustainability Analysis under the Debt Sustainability Framework for Low-Income Countries. The DRA reveals that, after traditional debt relief mechanisms are applied, Somalia’s debt burden expressed as the net present value of debt-to-exports ratio is 344.2 percent at the end of December 2018—significantly above the HIPC Initiative threshold. Despite the challenging environment, progress on reform and policy implementation has been good and sustained reforms have translated into economic results. In addition to the coordinated support from the World Bank and the IMF, reforms have been supported by other development partners.

A Theory of Social Impact Bonds

Social impact bonds (SIBs) are an innovative financing mechanism for public goods. In a SIB, an investor provides capital to a service provider for a social intervention. The investor receives a return based on the outcome of the intervention relative to a predetermined benchmark. We describe the basic structure of a SIB and provide some descriptive statistics for these financial instruments. We then consider a formal model of SIBs and examine their ability to finance positive net present value projects that traditional debt finance cannot. We find that SIBs expand the set of implementable projects if governments are pessimistic (relative to the private sector) about the probability an intervention would succeed or if the government is particularly averse to paying costs associated with a project that does not generate offsetting benefits. As both these features are present in various public programs, we conclude that SIBs are a real innovation in public finance and should be considered for projects when traditional debt finance has been rejected.

A Theory of Social Impact Bonds

Social impact bonds (SIBs) are an innovative financing mechanism for public goods. In a SIB, an investor provides capital to a service provider for a social intervention. The investor receives a return based on the outcome of the intervention relative to a predetermined benchmark. We describe the basic structure of a SIB and provide some descriptive statistics for these financial instruments. We then consider a formal model of SIBs and examine their ability to finance positive net present value projects that traditional debt finance cannot. We find that SIBs expand the set of implementable projects if governments are pessimistic (relative to the private sector) about the probability an intervention would succeed or if the government is particularly averse to paying costs associated with a project that does not generate offsetting benefits. As both these features are present in various public programs, we conclude that SIBs are a real innovation in public finance and should be considered for projects when traditional debt finance has been rejected. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Crowdfunding and Bank Financing: Substitutes or Complements

In this paper we analyze a firm choice between crowdfunding and bank financing. The interplay of these two important types of financing for entrepreneurial firms has not been extensively studied in existing literature while for many entrepreneurs it is an important issue. We analyze a model where the choice of financing is affected by moral hazard problem regarding the choice of production scale that favors bank financing, and by the uncertainty about consumer valuation of the product that favors crowdfunding. We show that a mixed financing where the firm uses a short crowdfunding campaign and a bank loan is optimal when the project is relatively large. Otherwise, traditional debt financing or crowdfunding without bank loan can be optimal. The model generates empirical predictions most of which have not been tested sofar.

(Debt) Overhang: Evidence from Resource Extraction

I study the empirical importance of debt overhang using a unique dataset on resource extraction firms, which provides ex ante measures of investment opportunities and important variation in the terms of a firm's obligations. In particular, unsecured reclamation liabilities create overhang that is costly to resolve and induces firms to forgo and postpone positive NPV investments. Traditional debt, in contrast, imposes few overhang-related investment distortions. These results show that: (i) the overhang problem is potentially large and applies more broadly to a firm's non-debt liabilities; and (ii) overhang problems associated with traditional debt can be avoided through contracting and debt composition.

Prospects and Challenges of Crowdfunding Financing Model for Housing Delivery in Lagos, Nigeria

Presently, there is a growing clamour for alternative financing models for housing development. This clamour is due to the perceived issues associated with traditional debt and equity financing models. Therefore, this study presents an attempt to assess the prospects and challenges of crowdfunding financing model for housing delivery in Lagos, Nigeria. The study adopted a survey approach by administering questionnaires to Estate firms situated in Lagos. The study found that the awareness of the concept of crowdfunding is the factor that presents the greatest challenge to the practice. Other important factors are by the perceived benefits that will accrue from achieving the project, availability of extant laws, regulatory framework and agency, state of the economy, and time taken to pool funds together.

Beyond Conventional Sovereign Debt Instruments: Issuance of GDP-linked Bonds in OECD Countries?

Debt-to-GDP measures in major OECD countries are at historical highs and a considerable part of sovereign debt needs to be refinanced soon, while projections of real GDP growth are fairly weak and uncertain and assessed sovereign credit quality has declined. Against this, the OECD Committee on Financial Markets discussed proposals for sovereign debt managers to consider issuing GDP-linked sovereign bonds. The Committee considered proposals timely and the idea conceptually attractive, as additional insurance against economic downturns over the medium term would be available. It identified however also a number of issues that would complicate issuance in practise. Questions arise in particular as regards investor demand for such instruments and how an additional novelty, liquidity and indexation premium would compare to a potentially reduced default premium on more traditional debt. Debt management offices confirm and stress such practical difficulties and remain sceptical, quoting a lack of sustainable demand for such bonds. As a result, issuance of such bonds would be too costly. It is not clear however whether debt management offices take into account the full macroeconomic and financial stability risk-return trade-off that a broader perspective would take into account. Proposals for issuance of sovereign GDP-linked bonds among advanced economies, which had received increased attention after the German G20-presidency included the topic in the G20 finance track, may have lost some momentum, but there continues to be considerable support from both academics and practitioners.