The corporate choice between public debt,bank loans,traditional private debt placements,and 144A debt issues

The main purpose of this study is to examine the determinants of the corporate choice between different forms of debt financing. By analyzing the most comprehensive sample of US corporate debt issues to date, I find that firms that issue 144A debt have significantly lower credit quality and higher information asymmetry than firms that issue traditional non-bank private debt. Further, the study shows that traditional private placements, rather than bank loans, are the favorite private debt source for firms with good credit quality. I also show that the firm characteristics of traditional private debt issuers have significantly changed after 1990 through to 2003. My results suggest the following pecking order of debt choices which is conditional on credit quality. In other words, high credit quality firms prefer public bond offerings and small firms, with good credit quality, are more likely to issue traditional private debt. A large group of firms characterized by moderate credit quality make extensive use of bank loans and poor credit quality firms preferentially issue 144A debt.     

Interest rate changes and the timing of debt issues

There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970–2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.     

The Performance of Long-run Stock Returns Following Issues of Public and Private Debt

This study uses a balance sheet-based method to identify both public and private debt issues. This feature is important because there have been no studies of the information content of private debt issues, while private debt is substantially more prevalent than public debt. We find no abnormal returns following straight debt issues. However, convertible debt issuers under-perform the market on the order of 50 to 70 percent in the following five years. In pursuit of explanations, we find that convertible debt issues signal a deterioration of future profitability, which accounts for at least part of the stock price underperformance.     

THE COSTS OF RAISING CAPITAL

We report the average costs of raising external debt and equity capital for U.S. corporations from 1990 to 1994. For initial public offerings (IPOs) of equity, the direct costs average 11.0 percent of the proceeds. For seasoned equity offerings (SEOs), the direct costs average 7.1 percent. For convertible bonds, the direct costs average 3.8 percent. For straight debt issues, the direct costs average 2.2 percent, although they are strongly related to the credit rating of the issue. All classes of securities exhibit economies of scale, although they are less pronounced for straight debt issues. IPOs also incur a substantial indirect cost due to short-run underpricing. Most large equity offers include an international tranche, although debt issues do not.     

Information asymmetry,external certification,and the cost of bank debt

This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that certification is associated with a lower cost of debt for subsidy recipients if the amount of private information of the lender is limited or the local credit market is less competitive. Public information loses importance once the bank accumulates information over the course of the lending relationship or the credit market is more competitive. Our results highlight a positive effect of external certification, driven by the signal it provides to both the lending bank and its competitors, and suggest that public and private information can be substitutes in the pricing of bank debt.     

THE MARKET REACTION TO STRAIGHT DEBT ISSUES: THE EFFECTS OF FREE CASH FLOW

In this paper we measure the market reaction to 937 straight debt issues between 1983 and 1993. We find a negative and significant market reaction to a straight debt announcement. In addition, we find that the market reaction to a straight debt issue is directly related to the issuing firm's level of existing cash and inversely related to the issuing firm's investment opportunities.     

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 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.     

Yankee Bonds and Cross-Border Private Placements

With credit spreads and U.S. Treasury yields near historical lows and the recent relaxation of U.S. regulatory reporting requirements, the U.S. bond markets are more and more frequently the markets of choice for international issuers. Total cross-border U.S. bond issuance is expected to top $200 billion in 1997, easily surpassing previous issuance levels.
Overseas issuers have three primary forms through which they can participate in the U.S. long-term debt markets: publicly traded, SEC registered bonds (commonly known as "Yankee" bonds); traditional private placements; and underwritten Rule 144A private placements. Each of these three financing methods has distinct benefits and limitations that should be thoroughly evaluated in light of the specific objectives of the issuer. Yankee bonds are typically the most cost-efficient vehicle for large, investment-grade issuers. The fastest growing segment is the rule 144A market, which accounted for 38% (by number, not dollar volume) of all U.S. cross-border debt transactions in 1996. The Rule 144A structure is often used for complex structures requiring heavy rating-agency involvement, such as future financial flow transactions and project financings. The 144A market has also become a particular favorite with international issuers because of its less formal disclosure requirements and streamlined execution process. The private placement market, which accounted for 24% of cross-border transactions in 1996, continues to be the dominant choice of smaller issuers, companies with complicated "stories," and firms that do not wish to submit to regular scrutiny by rating agencies. This article provides a detailed analysis of each type of bond issuance and the related issues facing a financial officer in trying to determine the most appropriate source of long-term debt.     

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

In contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers’ actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default – a stark contrast to the ex‐post renegotiation ‘trip wire’ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex‐ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex‐ante renegotiation, in turn, is associated with decreased adverse credit events. Cross‐sectional results support these findings as the ex‐ante renegotiation role of accounting covenants varies with bondholders’ and trustees’ monitoring ability.     

Adverse Selection,Investor Experience and Security Choice in Venture Capital Finance: Evidence from Germany

This article analyses 336 German venture capital transactions from 1990 to 2005 and seeks to determine why selected financial securities differ across deals. We find that a broad array of financial instruments is used, covering straight equity, mezzanine and debt‐like securities. Based on the chosen financial securities’ upside potential and downside protection characteristics, we provide an explanation for the differing use of these securities. Our results show that investors’ deal experience, adverse selection risks and economic prospects in the public equity market influence the selection of financial securities.     

‘Hot’ Debt Markets and Capital Structure

This paper examines the motives of debt issuance during hot‐debt market periods and its impact on capital structure over the period 1970–2006. We find that perceived capital market conditions as favourable, an indication of market timing, and adverse selection costs of equity (i.e., information asymmetry) are important frictions that lead certain firms to issue more debt in hot‐ than cold‐debt market periods. Using alternative hot‐debt market issuance measures and controlling for other effects, such as structural shifts in the debt market, industry, book‐to‐market, price‐to‐earnings, size, tax rates, debt market conditions and adjustment costs based on debt credit ratings, we find that firms with high adverse selection costs issue substantially more (less) debt when market conditions are perceived as hot (cold). Moreover, the results indicate that there is a persistent hot‐debt market effect on the capital structure of debt issuers; hot‐debt market issuing firms do not actively rebalance their leverage to stay within an optimal capital structure range.     

Did the Market Signal Impending Problems at Northern Rock? An Analysis of Four Financial Instruments

The academic literature has regularly argued that market discipline can support regulatory authority mechanisms in ensuring banking sector stability. This includes, amongst other things, using forward‐looking market prices to identify those credit institutions that are most at risk of failure. The paper's key aim is to analyse whether market investors signalled potential problems at Northern Rock in advance of the bank announcing that it had negotiated emergency lending facilities at the Bank of England in September 2007. A further aim of the paper is to examine the signalling qualities of four financial market instruments (credit default swap spreads, subordinated debt spreads, implied volatility from options prices and equity measures of bank risk) so as to explore both the relative and individual qualities of each. The paper's findings, therefore, contribute to the market discipline literature on using market data to identify bank risk‐taking and enhancing supervisory monitoring. Our analysis suggests that private market participants did signal impending financial problems at Northern Rock. These findings lend some empirical support to proposals for the supervisory authorities to use market information more extensively to improve the identification of troubled banks. The paper identifies equities as providing the timeliest and clearest signals of bank condition, whilst structural factors appear to hamper the signalling qualities of subordinated debt spreads and credit default swap spreads. The paper also introduces idiosyncratic implied volatility as a potentially useful early warning metric for supervisory authorities to observe.     

Capital Structure and Debt Priority

We study a defaultable firm's debt priority structure in a simple structural model where the firm issues senior and junior bonds and is subject to both liquidity and solvency risks. Assuming that the absolute priority rule prevails and that liquidation is immediate upon default, we determine the firm's interior optimal priority structure along with its optimal capital structure. We also obtain closed‐form solutions for the market values of the firm's debt and equity. We find that the magnitude of the spread differential between junior and senior bond yields is positively, but not linearly related to the total debt level and the riskiness of assets. Finally, we provide an in‐depth analysis of probabilities of default and the term structure of credit spreads.     

Debt Financing and Voluntary Adoption of the International Financial Reporting Standards: Evidence from Korean Unlisted Firms

We investigate the effect of debt financing on the voluntary adoption of the International Financial Reporting Standards (IFRS) by unlisted firms and such adoption’s effect on bond credit rating. We find that unlisted firms with public debts are more likely to voluntarily adopt IFRS. Subsequent to the voluntary application of IFRS, the unlisted firms exhibit, on average, enhanced credit ratings. These findings suggest that the public debt market’s demand for high-quality financial reporting may drive those unlisted firms to voluntarily adopt IFRS. Furthermore, rating agencies seem to reward such firms by elevating their bond credit ratings.     

The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period

In this article we examine whether the federal safety net is viewed by the market as being extended beyond de jure deposits to other bank debt and even the debt of bank holding companies (BHCs). We extend previous research by focusing on the post‐FDICIA period and by examining the risk‐return relation of bonds issued directly by banks, not BHCs. Our results provide evidence that both bank and BHC bonds are priced by the secondary market in relation to their underlying credit risk, particularly for less capitalized issuers, suggesting that proposals requiring banks to issue subordinated debt may enhance market monitoring and discipline and be useful in supplementing regulatory discipline.     

多层次市场中场外CDS工具发展与监管

券商经营活动中,在信用、市场规则、融资者与投资者等议题上面临特殊困境,核心体现在多层次资本市场建设的重要环节之一:即信用风险转移和分散功能难以实现,信用债券市场发展迟缓。基于对已有信用风险缓释工具现状的分析,券商从实务角度出发构建了涉及场外CDS业务市场准入、做市商交易、风险控制、会计、产品线、定价和业务监管等一系列制度。CDS具有不可替代的功能,并在海外成熟的多层次资本市场中与场内股票、债券交易一并构成基础性市场。盲目对CDS的抵触对我国多层次资本市场建设并无益处。     

Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity?

Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt‐ and equity‐related financing costs. Therefore, it is puzzling why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model that incorporates convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is reflected in the debt‐like design of most European convertible issues.     

社会信用、刚兑信仰与地方政府隐性债务

防范化解地方政府隐性债务风险是当前我国亟待解决的重要问题。本文基于2007年至2019年293个地级市面板数据,研究社会信用对地方政府隐性债务的影响。我们发现:(1)社会信用下滑会导致地方政府隐性债务规模提高和融资成本上升。(2)社会信用通过影响市场金融资源供给和政府债务需求进而影响隐性债务规模与融资成本,但上述机制在有无“刚兑信仰”情境下存在差异。(3)对比新《预算法》和“43号文”出台前后社会信用对隐性债务影响的异质性发现,债务管制显著提高了融资平台的市场化程度。虽然政策前期金融市场更多呈现出一种观望态度,但违约事件打破了金融市场对地方政府隐性债务的“刚兑信仰”,隐性债务发行受到的市场约束力度显著增强。本文对更好地认识地方政府隐性债务风险、理解当前债务治理措施的有效性以及未来如何通过完善社会信用体系建设化解地方政府隐性债务风险具有启示意义。     

The Costs, Wealth Effects, and Determinants of International Capital Raising: Evidence from Public Yankee Bonds

This paper examines the costs, wealth effects, and determinants of international capital raising for a sample of 260 public debt issues made by non-U.S. firms in the Yankee bond market. We find that investors demand economically significant premiums on bonds issued by firms that are located in countries that do not protect investors' rights and do not have a prior history of ongoing disclosure. The results provide support for the literature that suggests better legal protections and more detailed information disclosure increases the price investors will pay for financial assets. Journal of Economic Literature Classification Numbers: F3, G1.     

A public good approach to credit ratings – From concept to reality

From the onset of the 2008–2009 financial crisis to the subsequent European sovereign debt crisis, credit rating agencies have been assigned considerable blame. Reforming the credit rating industry has hence become an important policy issue. In addition to the regulatory efforts in the context of accepting the for-profit business model of ratings, there is a growing realization that credit ratings bear the characteristics of a public good. Financial market participants need reliable, transparent and independent assessment of credit risks. Credit ratings are therefore better viewed as an infrastructure matter. However, the proposed regulations seem to have missed this point. This paper introduces a new approach to credit ratings undertaken by the Risk Management Institute at the National University of Singapore that is predicated on the provision of credit ratings as a public good. With a public good alternative in place, the currently predominant for-profit business model may be counterbalanced.