Debt Issuance in the Face of Tax Loss Carryforwards

We examine the market impact of issuances of public and private debt by firms with sizeable tax loss carryforwards (TLCFs). Public issuances are met with a significantly negative stock price reaction, while private placements are associated with a positive marginally significant stock price reaction. After controlling for asymmetric information proxies, the stock price reaction to the debt issuance is more negative, the larger the TLCF. The evidence suggests that debt financing is suboptimal when issuers have large TLCFs, which in turn, supports the relevance of taxes for debt usage.     

Rating agencies and the role of rating publication rights

While credit rating agencies disclose all public ratings as a matter of policy, a firm can choose whether to make a so called private rating public or to keep it confidential. This paper analyzes the economic role of such rating publication rights. In particular, the paper tries to answer the following two questions: (1) If firms have scope to disclose agency ratings at their own discretion, can they use this discretion strategically and conceal low-quality ratings?, and (2), if this is the case, what are the economic implications for rated firms, unrated firms and the rating agency, resulting from strategically motivated selective rating disclosures? Using a theoretical model, it is shown that an equilibrium with partial nondisclosure of low-quality ratings can emerge whenever investors cannot be sure whether rating nondisclosure is due to the firm being not rated, or due to the rating’s adverse content. Moreover, since from an investors’ perspective, strategically acting rated firms and unrated firms are pooled, unrated firms’ debt is always under-valued (compared to a situation in which investors know that the firm is not rated), and the debt of firms concealing their rating is always over-valued.     

Being private,Big 4 auditors,and debt raising

This study investigates the role of auditor choice (Big 4/Non-Big 4) in debt financing for private and public firms. We find private firms have less access to debt than public firms, and Big 4 auditors support debt raising in both private and public firms. Consistent with private firms facing greater information asymmetry, Big 4 auditors are more important for debt raising in private firms than in public firms. The benefit of appointing Big 4 auditors for private firms' debt raising is greater in the opaque information environment of the global financial crisis. It is also greater when firms are smaller, younger, or have poorer financial reporting quality. We also find evidence consistent with Big 4 auditors mitigating agency conflicts and enhancing debt raising when ownership concentration is higher in private firms.     

Debt financing in private and public firms

Using administrative confidential data on the universe of Canadian corporate firms, we compare debt financing choices of private and public firms. Private firms have higher leverage ratios, which are entirely driven by private firms’ stronger reliance on short-term debt. Further, private firms rely more of leverage during economic expansions, while public firms rely on equity financing. Specifically, private firms manage to increase their long-term debt during expansions, while short-term debt is used during downturns. Our findings have implications for a better understanding of the role of asymmetric information in private firms’ capital structure decisions.     

The Role of Default Risk in Determining the Market Reaction to Debt Announcements

The stock price reaction to straight debt announcements is examined by differentiating firms on the basis of any subsequent change in their overall default risk. Results indicate that firms that will within six months of straight debt announcements undergo debt rating downgrades experience significant negative abnormal stock returns at the time of the new debt announcements, while firms with bond ratings that are later upgraded exhibit significant positive abnormal returns. Multiple regression analysis shows these results to be robust to the influence of filing size, tax shield effects, relative pre-announcement long-term debt levels, and subordination effects.     

Do managers withhold bad news from credit rating agencies?

Research documents that managers, on average, withhold bad news and emphasize good news in their public disclosures. We ask whether the same is true in their private communications with credit rating agencies. We study how rating agencies anticipate and react to public information events as a function of their access to rated firms’ private information. We show that, in terms of ratings downgrades, rating agencies exhibit relatively more anticipation and less reaction to negative (compared to positive) public information events when they have more access to private information. Our results are strongest when firms are most optimistic in their public disclosures and are not due to rating agencies focusing their efforts on downside risk. Overall, we find consistent evidence that rated firms provide less optimistic information to rating agencies in their private communications and that this information is reflected in credit ratings.

     

The Choice of Debt Source by UK Firms

We examine the choice of borrowing source among public debt, syndicated bank loans, bilateral bank loans and non‐bank private debt. Using a sample of 400 non‐financial firms over the period 2000–2012, we find strong support for the reputational theory of borrowing source. Larger firms are more likely to borrow in public debt markets. Bank dependent firms are less likely to borrow in public debt markets and choose between bank and non‐bank private debt based on maturity, collateral available to lenders and other firm characteristics. These results are consistent with the role of borrower reputation being the primary determinant of borrowing source for UK listed firms.     

IFRS Adoption and the Choice Between Public and Private Debt: Evidence from South Korea

This article examines the association between mandatory International Financial Reporting Standards (IFRS) adoption and corporate choice between public debt and private debt. If IFRS adoption increases the quality of lenders’ information environment provided on financial statements, firms are more likely to access the public debt market. Using a sample of public and private debts financing firms from 2000 to 2014 in Korea, we find that firms that file financial reports under the IFRS are less likely to finance from public debt markets, implying that the mandatory IFRS adoption has exacerbated the information environment of the public debt market in Korea.     

Do banks price their informational monopoly?

Theory suggests that banks’ private information lets them hold up borrowers for higher interest rates. Since new information about a firm is revealed at the time of its bond IPO, it follows that banks will be forced to adjust their loan interest rates downwards after firms undertake their bond IPO. We test this hypothesis and find that firms are able to borrow at lower interest rates after their bond IPO. Importantly, firms that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. We also find that it is costly for firms to enter the public bond market.     

Leverage-based index revisions: The case of Dow Jones Islamic Market World Index

US firms added to the Dow Jones Islamic Market World Index, a leverage-based index, witness permanent positive price and liquidity effects, whereas excluded firms sustain negative price and liquidity effects but no decrease in the investor awareness. Included/excluded firms experience a significant drop/no change in the cost of equity. Among the deleted firms, those with an increase in debt level bear a more severe decrease in liquidity and institutional ownership, and an increased cost of equity than those firms without an increase in debt use. Conveying private information on changes in a firm's corporate strategy and operating environment, revisions by a leverage-based index are different from those by size-based indexes.     

Local Crowding-Out in China

In China, between 2006 and 2013, local public debt crowded out the investment of private firms by tightening their funding constraints while leaving state-owned firms' investment unaffected. We establish this result using a purpose-built data set for Chinese local public debt. Private firms invest less in cities with more public debt, with the reduction in investment larger for firms located farther from banks in other cities or more dependent on external funding. Moreover, in cities where public debt is high, private firms' investment is more sensitive to internal cash flow.     

The effects of bank relationships on firm private debt restructuring: Evidence from an emerging market

Our paper seeks to examine the direct benefit of bank relationships for a distressed borrower by assessing its influence on the success of firm private debt restructuring. We find that a distressed firm with a stronger bank relationship has a greater probability to successfully restructure its debt through private renegotiation. Accordingly, an analysis of credit rating recovery provides complementary evidence on the factors of successful debt restructuring. A duration analysis of the length of time needed for a debt restructuring to be completed is fully consistent with our documented results. We conclude that in a bank dominated financial system like Taiwan's where firms are heavily bank-dependent, the bank-firm relationship is of crucial importance to the success of financially distressed firms in private debt restructuring.     

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.     

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.     

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.     

Does the Riskiness of R&D Outweigh Its Benefits? The Perspective of US Private Lenders

We investigate the relationship between R&D investments and loan spread. Prior research documents that R&D is associated with greater future benefits and risks, suggesting that the valuation of R&D depends on a tradeoff between the two. Some research finds that bondholders consider that the benefits of R&D outweigh its risks: R&D is negatively associated with bond yields. This is surprising given that debt holders are more concerned about downside risk due to asymmetric payoffs. Using data on private debt from the US, we find an overall positive association between loan spread and R&D intensity, suggesting that the riskiness of R&D appears to outweigh its benefits for private lenders. Furthermore, an asymmetric payoff structure implies that the risks of R&D for lenders increase with default risk. Consistent with this argument, we find a positive association between R&D and loan spread for firms that are smaller, with high default‐risk ratings, unrated (no public debt), or in industries with weaker legal protection. Unrated firms are in the most R&D‐intensive group and make up nearly 60% of the firms with private debt. Consequently, studies that exclude unrated firms are likely to present an incomplete picture of the perspective of debt holders on R&D.     

Informed trading in public debt markets

This study examines the occurrence of informed trading in public debt issued by companies in the United States. I find that earnings surprises are positively associated with bond price changes prior to the release of financial report data to the public, for firms with non‐investment‐grade ratings. Additionally, I find that the effect appears to be driven by firms with publicly traded equity. Evidence further indicates an increase in trading activity during the time window between report period end date and filing date, for firms with larger earnings surprises.     

Do banks really monitor? Evidence from CEO succession decisions

We demonstrate that banks play an important monitoring role in CEO succession that is not observed for other types of lenders, particularly public bondholders. There is a stronger relation between cash flow performance and forced CEO turnover for firms issuing bank debt during the year of CEO turnover than for firms not issuing bank debt, and bank debt issuance increases the likelihood of external CEO succession. The stock price reaction to CEO succession is higher when bank monitoring is prevalent. Our results are consistent with theories of relationship banking that propose a valuable monitoring role for well informed, incentivized bank lenders.     

The Valuation Effects of Private Placements of Convertible Debt

Share price reactions to announcements of 61 private placements of convertible debt securities are investigated and a significant positive average abnormal return of 1.80% is documented. This unique result contrasts with the negative average abnormal return associated with public sales of convertible debt securities. The positive effect on common shareholders' wealth appears to be related to the relative size of the private issue and unrelated to the degree to which the convertible bond is “out-of-the-money” at issuance.     

Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

When the fair value accounting (FVA) option for property, plant, and equipment was introduced in the midst of the global financial crisis, a significant proportion of Korean firms elected FVA. We attribute this unusual boom in asset revaluations to the nation's culture of government intervention and civilian compliance, which was particularly espoused during this period of financial turmoil, and a foreseeable option to switch back to historical cost accounting. We find that among those firms whose debt‐to‐equity ratios are low, public firms opt for the FVA option more often than private firms, suggesting that the need to communicate fair value information with diversified equity holders is more important than the need to do so with creditors. In contrast, among those firms whose debt‐to‐equity ratios are high enough to warrant such unfavorable dispositions as new debt freezes and monitoring by regulators, we find no difference in the FVA choice between private and public firms. These findings imply that during the global financial crisis, private firms that rely heavily on debt financing have a strong incentive to utilize FVA to comply with government guidelines for the debt‐to‐equity ratio and to ease a potential hold‐up problem by influential creditors.