Model uncertainty and intertemporal tax smoothing

In this paper we examine how model uncertainty due to the preference for robustness (RB) affects optimal taxation and the evolution of debt in the Barro tax-smoothing model (1979). We first study how the government spending shocks are absorbed in the short run by varying taxes or through debt under RB. Furthermore, we show that introducing RB improves the model׳s predictions by generating (i) the observed relative volatility of the changes in tax rates to government spending, (ii) the observed comovement between government deficits and spending, and (iii) more consistent behavior of government budget deficits in the U.S. economy. Finally, we show that RB can also improve the model׳s predictions in the presence of multiple shocks.     

Investment decisions and debt financing under information uncertainty

This study examines how information uncertainty influences investment decisions. In contrast to prior studies, which assume no information uncertainty, our model includes a discrepancy in valuing debt between shareholders and debtholders at the time of debt issuance. We derive the values of corporate securities and the optimal investment threshold and coupon under information uncertainty. We show that compared with the absence of information uncertainty, debtholders value debt less than shareholders do, and hence, shareholders should contribute more investment funds. Debt financing restraints due to information uncertainty lead to delayed investment. We find that information uncertainty plays a mitigating role in shareholder-debtholder conflicts over investment policy. Moreover, the information uncertainty costs that shareholders incur increase sharply with the level of information uncertainty.     

Democratic transition and fiscal policy in the Arab world

This paper investigates the relationship between democracy and public debt in the Arab world over the period 2002–2013. The results show strong evidence of an inverted U-shaped relationship between democracy and public debt. This means that democratization is associated with lower debt only when a certain level of democracy is reached. In an attempt to explain these findings, we assume that the effect of democracy on public debt operates mainly through its impact on government spending and government revenue. Our results show that the inverted U-shaped relationship between democracy and public debt stems from the inverted U-shaped democracy-government spending path and the U-shaped democracy-government revenue pattern. This implies that, at the earlier stages of democratization, democracy is associated with an increase in government spending and a decrease in government revenue, which stimulates public debt. However, beyond a certain level of democracy, further democratization reduces government spending and enhances government revenue, leading to lower levels of public debt. Hence, achieving some level of democracy is a key prerequisite to improve the effectiveness of public spending, enhance tax compliance, and thereby control public debt.     

Eurocredit Pricing in Sovereign Lending

Eurocredit pricing to sovereign borrowers was analyzed for the period leading up to the international debt crisis. The return variable measured both fees and spread, instead of spread alone. The importance in pricing of objective and subjective indicators of country-risk, loan characteristics, and regional factors were examined. The analysis revealed a discrepancy between a perceptual measure and an objective measure of country-risk. Eurocredit pricing was not positively related to loan size and maturity, commonly viewed as increasing risk, and may have also been influenced by regional and institutional factors.     

Growth and fluctuations: The role of public dividends and public spending

In this paper, we consider a discrete-time version of the endogenous growth model developed by Barro [Barro, R.J., 1990. Government spending in a simple model of endogenous growth. Journal of Political Economy 98, 103–125], but augmented in order to envisage a public participation in the production of private goods. Public dividends are invested in order to provide a public good; in turn, the public good plays a role of indispensable production externality and, eventually, of growth engine.For what concerns the production of private goods, we find that an optimal policy is always based on a positive participation of the government as shareholder; also, when growth is slow, a public intervention or large substitution effects stabilize the economy.A right mix of short-run services and long-run infrastructures is suggested in slow economies to rule out expectation-driven fluctuations. Infrastructures are mainly recommended in presence of moderate income effects, while services are recommended in presence of strong income effects.     

Debt and Development

This paper examines incentive and valuation effects of debt financing on land investment. When land is debt financed, the landowner holds both a development option on the land and a default option on the debt. Because development typically devalues the default option, investment may be delayed past the point at which efficient investment would otherwise proceed. The incentive to underinvest is shown to be more pronounced as debt level increases, i.e., as the debt becomes riskier. This agency problem provides an explanation as to why land is generally difficult to debt finance and may also explain why debt levels are relatively low for “land-intensive” real estate firms. Novel comparative statics show that debt value may increase for a given increase in asset volatility as well as for a given increase in interest rate. Renegotiation and restrictive contract provisions are considered as mechanisms to promote efficient investment policy in the presence of debt financing.     

Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries*

We analyse the sustainability of government debt for Latin American and Caribbean countries employing unit‐root tests with nonlinear alternative hypotheses and examine the robustness of our results against those from unit‐root tests with breaks and threshold nonlinearities. We show that, in general support for sustainability substantially improves when nonlinear mean reversion is taken into account. We also find that the results obtained from applying various tests with nonlinear alternatives, although broadly consistent, are not identical. This suggests that reliance on a single unit‐root test for assessing fiscal policy sustainability may be misleading.     

政府债务对经济增长的影响及作用渠道

基于1960～2010年113个国家的面板数据集,运用系统广义矩动态面板方法和稳健性分析,比较发达国家和发展中国家政府债务经济增长效应的差异,并尝试分析政府债务影响经济增长的渠道。研究结果显示,政府债务对经济增长有非线性影响;发达国家政府债务对经济增长、投资以及全要素生产率均无显著影响;发展中国家对政府债务的直接承受力更弱,但在一个宽松的临界点内,政府债务的增加可以提高投资率。     

The Market Perception of Convertible Debt Versus Straight Debt: some Empirical Evidence from U.S. Firms and Non-U.S. Firms Listed in the U.S.

Accounting for convertible debt has long been a source of controversy in the accounting profession in the U.S. Current U.S. accounting rules require classifying convertible debt at date of issuance as "entirely debt" until conversion, despite numerous studies that assert that convertible debt is not "entirely debt", but is a blend of debt and equity. Convertible debt has taken on international interest because of the issuance of International Accounting Standard (IAS) 32, Financial Instruments; Disclosure and Presentation, which prescribes reporting separate debt and equity components for convertible debt. This study examines convertible debt issued by U.S. firms and non-U.S. firms listed in the U.S. using a levels approach. Specifically, convertible debt is compared to straight debt and contrary to ex ante expectation, convertible debt was not found to be perceived as being significantly different than straight debt for U.S. firms for any years and is statistically different in only two of the six years tested for non-U.S. firms. The validity of this study's findings is underscored by its research design, which compares convertible debt and straight debt issued by the same firms. The findings suggest that investors regard reported amounts of convertible debt similar to straight debt in their assessment of firm value.     

债务率、偿债压力与地方债务的经济增长效应

研究目标：中国地方政府债务对于经济增长的门限效应。研究方法：基于债务率,即债务存量与地方政府综合财力的比值的视角,利用中国30个省份2010~2014年年底的地方债务余额数据,对地方债务的经济增长效应进行了实证研究。研究发现：中国地方债务存在明显的经济增长门限效应：当债务率高于112%左右之后,原本正向显著的经济增长促进作用基本趋近于无,而其作用渠道可以明确为如下传导机制,债务率高企带来地方政府偿债压力从而影响经济发展导向的财政支出。研究创新：引入债务率指标并基于偿债压力视角分析了地方债务对于经济增长的作用机制。研究价值：对于我国地方政府债务的管控治理和风险防范,具有重要的参考价值。     

Borrowing Constraints and Credit Demand in a Developing Economy

This paper investigates the determinants of credit demand in the presence of borrowing constraints in a developing economy. We model the determinants of observed debt for Chilean households while accounting for selection bias and the endogeneity of their income and specific household assets. Using a novel Chilean dataset, we estimate the relationship between household characteristics and consumer and mortgage debt. We find substantial differences in the nature of these relationships across the types of debt. For example, we find that the income elasticity for consumer debt is greater than 1 whereas for mortgage debt it is not. The results suggest the increased availability of credit, combined with the aging of the Chilean population, is likely to drastically change the distribution and level of Chilean debt. These findings are particularly relevant for other developing economies currently experiencing rapid income and debt growth. Copyright © 2015 John Wiley & Sons, Ltd.     

环境规制、流动性风险与债务融资成本

环境规制会影响企业经营和银行对企业的风险评价,进而影响企业债务融资成本。本文以我国A股2012~2017年重污染行业上市公司为研究对象,研究了环境规制对债务融资成本的具体影响。研究结果显示,环境规制强度对重污染企业债务融资成本具有正向影响作用;且这种影响效应在小规模企业和非国有企业更加显著;进一步研究发现,环境规制通过流动性风险路径影响企业债务融资成本。本文的研究丰富了企业债务融资成本相关文献,对企业加强债务融资管理与政府实施环保政策具有一定的启示作用。     

Relative Risk Aversion and Power‐Law Distribution of Macroeconomic Disasters

The coefficient of relative risk aversion is notoriously difficult to estimate. Recently, Barro and Jin (On the size distribution of macroeconomic disasters, Econometrica 2011; 79 (3): 434–455) have come up with a new estimation approach that fits a power‐law model to the tail of distribution of macroeconomic disasters. We show that their results can be successfully replicated using a more refined power‐law fitting methodology and a more comprehensive dataset. Copyright © 2014 John Wiley & Sons, Ltd.     

ECB tapering: beware of global consequences

• ? The ECB's scaling back of its QE programme in 2018 could be more disruptive to global financial markets than the Federal Reserve's ongoing balance sheet unwinding. ECB bond purchases led Eurozone private investors to inject a massive amount of funds into global debt markets over the last few years. As the ECB reduces its stimulus, Eurozone investors will gradually pare back the build‐up of their foreign debt exposures. The full unwinding of ECB QE will see investors rebalance toward domestic debt securities .
• ? We expect Eurozone investors to continue injecting funds into global debt markets as the ECB proceeds to wind down its QE, but they will do so at a much slower pace. Based on our projections, European purchases of foreign debt securities this year will total €200 billion – down by half from the average €400 billion over the last three years. Such a large reduction raises the risk of disruption in some markets.
• ? How did we get here? Spillovers from the ECB's QE were much more pronounced than during Fed's. European private investors that sold bonds to the ECB during its QE programme faced a commensurate shortage of domestic debt assets. In contrast to the US experience, ECB buying far exceeded new domestic issuance, inducing private investors to sharply increase purchases of overseas debt securities.
• ? Ultimately, we expect European investors to seek to restore the share of domestic debt securities in their portfolios to a level in line with the historical norm, after the proportion of their domestic debt holdings fell by 7pp since the programme began. The rebalancing is likely to start in earnest once the ECB stops buying (and eventually starts selling) securities. As a result, the global debt issuance boom is likely to lose steam, given the extent to which it has relied on the support of European investors.

     

Optimal Debt Contracts with Renegotiation

This paper sutudies the role of debt in committing a seller not to trade at a low price. We consider a discrete-time finite-horizon buyer–seller relationship. The seller makes an upfront relationship-specific investment, which is financed with debt. Debt then is repaid gradually to mitigate the hold-up risk. Even though debt is renegotiable, under the assumption that with a small probability renegotiation may fail and may lead to inefficient liquidation, debt still can be used as a commitment device. We solve for renegotiation proof dynamic debt contracts that are optimal for the seller and show that debt is repaid over the entire course of the relationship with declining repayments .     

Fixed versus floating: vulnerability to rising interest rates

• ? Looking at different economies' exposure to fixed‐ and floating‐rate private‐sector debt reveals how vulnerable they could be to rising interest rates. Our analysis finds that Hong Kong, Sweden, China and Australia are potentially most exposed via floating rates to rising debt service costs. A 150bp rise in rates would also push several other countries' debt service ratios above the peaks of 2008. Less vulnerable economies include the US and Germany.
• ? High levels of floating‐rate debt imply a large and rapid pass‐through of rising interest rates to firms and households, with negative consequences. Exposure to floating‐rate debt as a share of GDP varies greatly: the highest levels are in Hong Kong, China, Sweden, Australia and Spain, with the lowest levels in the US, France and Germany.
• ? Growing shares of fixed‐rate housing debt in the US, Eurozone and UK mean the impact of higher interest rates may be less severe than a decade ago. Private deleveraging in countries such as the US, UK and Spain could also soften the impact.
• ? A rise of 100bp in short‐term interest rates would raise the debt service ratio after one year by around 2.5% of GDP in Hong Kong, with increases of 1.5–1.7% of GDP in Sweden, China and Australia. The smallest effects would be in the US and Germany.
• ? A 100–150bp rate rise would push debt service ratios in China, Hong Kong, Canada, France and the Netherlands well above their peaks of a decade ago. A similar rate rise would take debt service ratios in Sweden, South Korea and Australia close to, or above, previous peaks.
• ? The distribution of debt within economies, which our analysis does not cover, is also important. For example, there is some evidence that the US corporate sector has a high concentration of debt among borrowers with weak finances. Countries that are highly vulnerable to interest rate rises may see their central banks normalise policy rates more slowly than they otherwise would.

     

希腊债务危机的负面影响与警示

对希腊债务危机的内外部原因进行分析,剖析希腊债务危机的负面影响,主要表现在:影响欧元区乃至欧洲经济的稳定,危机可能会蔓延到部分欧洲银行,债务解决出现两难困境,可能诱发全球赤字浪潮爆发,造成全球经济的波动。总结出希腊债务危机启示:欧盟①组建强有力的欧洲货币基金组织对债务问题进行及时有效的救助,金融创新需要与实体经济发展相匹配;对中国而言,尤其是要关注各级地方政府积累的巨额债务。     

Leverage and the price volatility of equity shares in equilibrium

The traditional valuation formulas for corporate debt, which are derived in a complete market setting and are based on the no-arbitrage principle, imply that equity prices become more volatile as leverage increases. If the asset structure is incomplete, the presence of corporate debt affects the linear subspace spanned by the payoffs of the existing assets, and the pricing of corporate debt and shares of levered firms becomes a simultaneous valuation problem. This paper characterizes the relationship between the price of corporate debt and the share price of a levered firm in an equilibrium framework where corporate debt is a non-redundant asset. While, in the absence of bankruptcy, higher leverage always implies riskier equity, it does not necessarily mean more volatile equity prices. In fact, the link between leverage and equity price volatility depends in a particular way on investors’ preferences towards risk.     

Determinants of capital structure choice: A structural equation modeling approach

In their seminal research on the determinants of capital structure choice using structural equation modeling (SEM), Titman and Wessels [Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43, 1–19] obtain weak results and hence call for further investigation. We apply a Multiple Indicators and Multiple Causes (MIMIC) model, with refined indicators, to a pooled sample for the period 1988–2003 and find more convincing results than those obtained by Titman and Wessels. With the capital structure measured simultaneously by the ratios of long-term debt, short-term debt, and convertible debt to the market value of equity, our results show that growth is the most important determinant of capital structure choice, followed in order by profitability, collateral value, volatility, non-debt tax shields, and uniqueness. Moreover, we find that long-term debt is the most important proxy of capital structure, followed by short-term debt, and then convertible debt.     

Debt financing,first-mover advantage,and vertical product differentiation

This paper examines the impact of the strategic use of debt financing as a commitment device, in a vertically differentiated duopoly with demand uncertainty. We consider various possible game sequences for two firms with asymmetric financial structures to enter the market. The results show that (i) having access to external debt does not necessarily promote the firm to provide a higher quality product; (ii) strategic debt improves the degree of product differentiation and benefits both firms; and (iii) a firm's optimal debt level is positively related to the first-mover advantage of introducing its product to the market.