ISSUER SOPHISTICATION AND UNDERPRICING IN THE NEGOTIATED MUNICIPAL BOND MARKET

Research on municipal bond offerings has established the determinants of effective competitive bidding, but no comparable research has been undertaken for the negotiated method. This study examines the effect of issuer sophistication on the interest costs for a sample of negotiated issues. The first part of the paper reviews the theory relating issuer sophistication, negotiated issues, and underpricing. The second part presents statistical evidence supporting the theory that the net interest cost of a sample of negotiated issues declines as issuer sophistication increases.     

Debt Schedules of Tax-Exempt Bonds Using NIC

Municipal bonds are a large proportion of the total number of securities offered every year. The volume outstanding is more than that of all federal agency debt. It is important that the issuance procedure be as cost efficient as possible. This research develops a model to minimize the net interest cost of a municipal bond issue. Net interest cost remains a highly popular award criteria. The model incorporates the level and shape of the yield curve, the schedule of revenue to be received, and the segmented nature of the municipal market.     

The Role and Impact of Financial Advisors in the Market for Municipal Bonds

Significantly more and more issuers of municipal bonds use the services of financial advisors during the bond issuance process. We investigate the benefits to issuers and market participants arising from the role of financial advisors in the issuance of municipal bonds. Using a large sample of 9,493 tax-exempt municipal bonds, we show that financial advisors have significant impact on borrowing costs, reoffering yields and underwriter gross spreads. Our results are more pronounced for revenue bonds, particularly for negotiated revenue issues. In addition, our results show significant advantages to using a financial advisor for refunding issues supporting the view that financial advisors play important roles for more complex issues. Our results are consistent with the interpretation that financial advisors provide important and useful services resulting in monitoring and information asymmetry reduction benefits accruing to issuers and market participants.      

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.     

An investigation of the asymmetric link between credit re-ratings and corporate financial decisions: “Flicking the switch” with financial flexibility

Using a large sample of non-financial US listed firms over the period from 1985 to 2009, we analyze the interactive effect of financial flexibility and credit re-ratings on corporate investment and financing decisions. Essentially, we document that financial flexibility (inflexibility) “flicks the switch” in the re-rating upgrades (downgrades) scenario. Specifically, a credit rating upgrade (downgrade) for financially flexible firms is followed by a reduction (no change) in their cost of capital, an increase (no change) in their capital expenditure and an increase (no change) in their net debt versus net equity issuance. In contrast, a rating upgrade (downgrade) for financially inflexible firms is followed by an insignificant change (an increase) in their cost of capital, an insignificant change (a decrease) in their capital expenditure and an insignificant change (a decrease) in their net debt versus net equity issuance. We offer plausible explanations for these asymmetric relations.     

Net share issues and the cross‐section of equity returns under a dividend imputation tax system

Despite considerable empirical evidence reporting a negative relationship between net share issuance and subsequent returns, it remains unresolved whether this anomaly is explained by risk or investor irrationality. This study examines the net share issuance anomaly using seasoned equity offerings before and after the introduction of an imputation tax system. We report robust evidence of a negative relationship between net share issuance and returns post‐imputation, but no relationship pre‐imputation. Our results provide evidence to support the international pervasiveness of the net share issuance anomaly, but more importantly suggest that this anomaly may be explained by risk.     

Discretionary accounting choices: the case of IAS 19 pension accounting

Based on a sample of 3207 firm-year observations for the years 2005–2013, we investigate how stock-listed companies in France, Germany and the UK use two discretionary choices in their accounting for defined benefit pension plans under International Accounting Standard (IAS) 19 Employee Benefits. We first analyse companies’ decision whether to voluntarily early adopt the equity method of accounting for actuarial gains and losses. Second, we analyse companies’ choice to present pension interest cost and expected return on plan assets, or, in 2013, net pension interest cost, in operating or financial income. Our findings provide evidence that companies’ decisions to early adopt the equity method in 2005, the first year this accounting choice was available, were motivated by short-term effects on equity. Our analyses also indicate that the choice regarding where to present interest cost and expected return on plan assets in the income statement is associated with the resulting effect on Earnings before Interest and Tax. Finally, we document country-specific differences in the use of the discretion provided under IAS 19, suggesting that discretionary pension accounting choices may impede comparability.     

Does the Quality of Financial Advice Affect Prices?

Using a large data sample of 58,562 new municipal issues covering the period from 1984 to 2002, we examine whether the quality of advice provided by a financial advisor affects new issue interest costs. We find that higher‐quality financial advisors are associated with statistically significant decreases in new issue yields. The effect of advisor quality on yields is more pronounced for revenue, negotiated, and opaque bond issues than for general obligation and competitively sold issues. However, issuers of revenue or negotiated bonds are more likely to choose a low‐quality advisor.     

Pre‐Issuance Hedging of Fixed‐Rate Debt

This article analyzes several corporate hedging strategies to manage interest rate risk on fixed‐rate debt prior to issuance. The authors start by considering these strategies using a highly stylized model: a binomial forward interest rate tree that, while simple in design, illustrates derivative pricing methodologies that are used in practice. Under a given rate volatility assumption, they demonstrate expected outcomes when entering a forward bond contract, a forward‐starting pay‐fixed interest swap, and a purchased option on that swap, as well as the “default” alternative of doing nothing. In principle, the decision of whether or not to hedge, as well as how to do so, depends on management's view of future interest rate volatility and degree of comfort with possible outcomes. The authors then assess the pros and cons of hedging strategies, with considerable emphasis on practical considerations. For example, while their theoretical model would allow an issuer to “lock” a specific debt issuance, in practice one can hedge only “benchmark” interest rate risk. The authors describe the use of both Treasury locks and forward‐starting swaps to address unexpected benchmark yield changes, and discuss how factors such as the time to issuance affect an issuer's choice of instrument. For instance, Treasury locks are typically used when the time to issuance is relatively short, while interest rate swaps are more common for longer times to issuance. The article also discusses circumstances in which a “do nothing” strategy may be preferable to other alternatives, as well as the disadvantages of issuing in advance. Finally, the authors describe the impact of financial accounting on different hedge strategies.     

Generating optimal true interest cost bids for new municipal bond competitive issues

In 1984 over $95 billion of new tax-exempt debt issues were sold to the public. A criterion for judging competitive bids which is enjoying an increase in usage is that of minimizing true interest cost (internal rate of return). The true interest cost bidding problem may be formulated as a non-linear integer program. By utilizing a novel linearization in concert with a special purpose integer programming algorithm, minimum true interest cost bids can be generated in a matter of seconds. Computational results from an actual bidding problem are presented.     

The profit versus loss heuristic and firm financing decisions

This paper examines the extent to which the profit versus loss heuristic directly affects debt issuance decisions. We hypothesize that reporting a loss and its use as a heuristic rather than firms’ economic fundamentals has an impact both on the decision to raise external debt finance and on the choice between debt and equity financing. The results are consistent with the hypothesis. We find that there is a sharp and economically-significant discontinuity around the zero-earnings threshold in the level of debt issues. Firms reporting small losses issue significantly less debt than firms reporting small profits. We also find that the loss heuristic has an impact on the choice between debt and equity in that loss firms issue less debt relative to equity. Taken together the results are consistent with the notion that profit versus loss heuristic impacts the debt issuance decision and provide explanations that add to those offered by the traditional theories.     

Disclosure,conservatism and the cost of equity capital: A review of the foundation literature

In this review piece, we survey the literature on the cost of equity capital implications of corporate disclosure and conservative accounting policy choice decisions with the principle objective of providing insights into the design and methodological issues, which underlie the empirical investigations. We begin with a review of the analytical studies most typically cited in the empirical research as providing a theoretical foundation. We then turn to consider literature that offers insights into the selection of proxies for each of our points of interest, cost of equity capital, disclosure quality and accounting conservatism. As a final step, we review selected empirical studies to illustrate the relevant evidence found within the literature. Based on our review, we interpret the literature as providing the researcher with only limited direct guidance on the appropriate choice of measure for each of the constructs of interest. Further, we view the literature as raising questions about both the interpretation of empirical findings in the face of measurement concerns and the suitability of certain theoretical arguments to the research setting. Overall, perhaps the message which is most clear is that one of the most controversial and fundamental issues underlying the literature is the issue of the diversifiability or nondiversifiability of information effects.     

The Seasoned‐Equity Issues of UK Firms: Market Reaction and Issuance Method Choice

Abstract:   This study examines the seasoned equity issues of companies traded on the London Stock Exchange. Recent regulatory changes have allowed UK firms more discretion in choice of issue approach, and this has led many firms to issue through placing in preference to a rights issue. Having first documented the trend towards increasing use of placings, we go on to identify an interesting subset of placings that are less likely to be anticipated by the market, and find a significant positive market reaction to such placings, which contrasts with the significant negative reaction we find for issues by rights. We also examine the choice of seasoned equity issuance method, focusing on the choice between placings versus rights issues. We develop a model to explain the choice of equity issue method that achieves a high level of predictive accuracy.     

Credit Crunches from Occasionally Binding Bank Borrowing Constraints

We present a model in which banks and other financial intermediaries face both occasionally binding borrowing constraints, and costs of equity issuance. Near the steady state, these intermediaries can raise equity finance at no cost through retained earnings. However, even moderately large shocks cause their borrowing constraints to bind, leading to contractions in credit offered to firms, and requiring the intermediaries to raise further funds by paying the cost to issue equity. This leads to the occasional sharp increases in interest spreads and the countercyclical, positively skewed equity issuance that are characteristics of the credit crunches observed in the data.     

Access to capital,investment, and the financial crisis

During the recent financial crisis, corporate borrowing and capital expenditures fall sharply. Most existing research links the two phenomena by arguing that a shock to bank lending (or, more generally, to the corporate credit supply) caused a reduction in capital expenditures. The economic significance of this causal link is tenuous, as we find that (1) bank-dependent firms do not decrease capital expenditures more than matching firms in the first year of the crisis or in the two quarters after Lehman Brother's bankruptcy; (2) firms that are unlevered before the crisis decrease capital expenditures during the crisis as much as matching firms and, proportionately, more than highly levered firms; (3) the decrease in net debt issuance for bank-dependent firms is not greater than for matching firms; (4) the average cumulative decrease in net equity issuance is more than twice the average decrease in net debt issuance from the start of the crisis through March 2009; and (5) bank-dependent firms hoard cash during the crisis compared with unlevered firms.     

Do shareholders benefit from green bonds?

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007–2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a consistently significant premium for green bonds, suggesting that the positive stock returns around green bond announcements are not fully driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm's issuance of green bonds is beneficial to its existing shareholders.     

An Integrated Model of Debt Issuance, Refunding, and Maturity

We integrate previous work in this area and develop a multiperiod model that simultaneously determines bond refunding, bond issuance, maturity structure, cash holdings, and bank borrowing policies. The focus here is on providing the required debt funds in the most cost efficient fashion. A strength of the model is that it allows for time varying interest costs, transaction costs, issuance costs, and refunding costs to be firm specific. The output of the model lays out the optimal financing decisions for each time interval that minimize the total discounted cost of providing the funds that match the requisite funds. By limiting the surplus funds available, the model minimizes the management incentive to over invest and thereby reduces the agency costs. The model has economic implications for the financing decisions and the firm's default risk, growth opportunities, riskiness of cash flows, and firm size. JEL Classification: G30     

论构建具有自我约束能力的人民币发行机制

无论以何种口径衡量,人民币发行过多都是不争的事实,导致这一现象的最重要的原因就在于人民币发行方式本身的局限。比较国际上主要货币的发行方式就能发现,人民币发行明显缺乏自我约束机制。解决这一问题的出路在于构建买国债发货币的框架,树立国民利益为本的目标原则,同时推进相关的条件和环节的规范与完善。     

Taxation of Interest Income

Why is interest income taxed so much more heavily than other forms of capital income? This differential tax treatment has generated substantial tax arbitrage, resulting in lower tax revenue, efficiency costs, and apparently net gains to rich borrowers and net losses to poor lenders, together suggesting that this tax treatment makes no sense on welfare grounds. In examining this argument more formally, this paper reveals two omitted considerations that can help explain the existing tax treatment. First, the forecasted increase in the market interest rate results in a redistribution from rich borrowers to poor lenders. Yet this redistribution comes at no marginal efficiency cost, starting from a situation with no distortions to portfolio choice, so at the margin dominates further redistribution through the income tax. In addition, information about an individual's portfolio choice reveals information about her earnings ability, even controlling for observed labor income, if those who are more able tend to be less risk averse. By making use of this extra information about earnings ability, the tax system can be better tailored to redistribute from able to less able, for any given efficiency cost.     

YANKEE BONDS AND CROSS-BORDER PRIVATE PLACEMENTS: AN UPDATE

With 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 crossborder U.S. bond issuance is expected to top $350 billion in 2000, 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, and they are expected to account for over 75% of the $350 billion market in 2000. Second in importance is the rule 144A market, which is typically 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 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 issues facing a financial officer in trying to determine the most appropriate source of long-term debt.