The impact of firm size on bank debt use

I use a sample of US firms to examine the determinants of the concentration of bank debt in total debt. The results indicate that the factors vary by size of the firm. A small- to medium-sized firm has a high concentration of bank debt when it has a low level of discretionary spending. In contrast, a large firm has a high concentration of bank debt when it is difficult for outsiders to observe. The results support the Diamond [J Polit Econ 99 (1991) 689] reputation view that a firm faces different debt choices as it grows. When evaluating bank regulations, policymakers should consider the importance of the reputation-building services, which a bank provides to businesses.     

The impact of rights issues of convertible debt in Australian markets

Australian convertible debt issues are rights issues of non-callable securities and are issued in a market characterised by thin trading, significant institutional investor participation rates and a high number of resource firms. However, this study documents a significant negative announcement effect for rights issues of convertible debt, similar to international evidence. An analysis of the determinants of the announcement effect supports variants of the information asymmetry and agency cost hypotheses. The results do not support the convertible debt models of Kim [Kim, Y., 1990. Informative conversion ratios, a signalling approach. Journal of Financial and Quantitative Analysis 25, 229–243], Brennan and Kraus [Brennan, M., Kraus, A., 1987. Efficient financing under asymmetric information. Journal of Finance 42, 1225–1243], Green [Green, R.C., 1984. Investment incentives, debt and warrants. Journal of Financial Economics 13, 115–136] but some support is found for Stein's [Stein, J., 1992. Convertible bonds as backdoor equity financing. Journal of Financial Economics 32, 3–22], convertible debt model and Mayers [Mayers, D., 1998. Why firms issue convertible bonds: the matching of financial and real investment options. Journal of Financial Economics 47, 83–102], sequential financing model. However, support is found for Brous and Kini [Brous, P.A., Kini, O., 1994. The valuation effects of equity issues and the level of institutional ownership: evidence from analysts’ earnings forecasts. Financial Management 23, 33–46], equity issue based external monitoring model and Eckbo and Masulis [Eckbo, B., Masulis, R., 1992. Adverse selection and the rights offer paradox. Journal of Financial Economics 32, 292–332], rights issue adverse selection model.     

Asset redeployability and the choice between bank debt and public debt

A firm with less redeployable assets, which are assets that have fewer alternative uses outside the firm, is more likely to borrow from banks than issue public debt. These findings are consistent with firms with less redeployable assets valuing the ability to renegotiate bank debt contracts instead of selling assets in the event of default. Consistent with this mechanism, firms with lower asset redeployability sell fewer assets following covenant violations. Our results contribute to work on the determinants of which debt markets a firm chooses to borrow from and the role that banks play as intermediaries.     

Political rights and the cost of debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.     

Corporate ownership structure and the choice between bank debt and public debt

This article examines the relation between a borrowing firm's ownership structure and its choice of debt source using a novel data set on corporate ownership, control, and debt structures for 9,831 firms in 20 countries from 2001 to 2010. We find that the divergence between the control rights and cash-flow rights of a borrowing firm's largest ultimate owner has a significant negative impact on the firm's reliance on bank debt financing. In addition, we show that the control-ownership divergence affects other aspects of debt structure including debt maturity and security. Our results indicate that firms controlled by large shareholders with excess control rights may choose public debt financing over bank debt as a way of avoiding scrutiny and insulating themselves from bank monitoring.     

The role of accruals quality in the access to bank debt

This work analyses the effect of accruals quality in the access of firms to bank debt in a panel data of SME Spanish firms. The results show a positive association between accruals quality and bank debt, even when controlling for other determinants of bank debt and for possible endogeneity between bank debt and accruals quality, which suggests that higher precision of earnings reduces information asymmetries with banks and favors the access of firms to bank loans.     

The value of corporate voting rights embedded in option prices

This paper proposes and tests a new method to extract the value of corporate voting rights from market prices of American-style single-stock options. The method models voting-right values as non-cash dividends and backs them out via numerical optimization from prices of equity options. Simulation experiments show that the method is accurate and outperforms existing option-based approaches by reducing their measurement error from 17.2% to 1.57% in terms of root mean squared errors and almost eliminates their bias.The paper also contributes an empirical analysis of corporate voting-right values in European companies in the time period between 2003 and 2010. Voting rights have an annualized average value of 0.37% of the share price and are significantly worth more in months in which either ordinary or extraordinary general meetings take place but no single shareholder holds a majority stake in the company. Finally, voting values are higher in companies incorporated in French-civil-law countries (France and the Netherlands) than in German-civil-law countries (Germany and Switzerland).     

The source of value of voting rights and related dividend promises

This paper examines the relative share pricing of 98 firms with two classes of common stock trading in the United States from 1984 to 1999. The firms feature common stock classes with differential voting rights and, in some cases, differential rights to dividends. The observed voting premiums are higher than those reported in previous studies of U.S. firms and are dependent on the form of dividend promise to the low-vote shareholder. The voting premium is higher in the presence of a control threat, when insiders do not hold controlling voting power, and during periods of poor firm performance.     

The reaction of bank stock prices to the international debt crisis

In this paper we develop a cross-sectional regression approach to estimate the impact of foreign loan exposure on the pricing of U.S. bank stocks. A new approach is required because news about foreign loan problems may arrive incremently over time, rather than reaching the market on a few specific dates the way earnings and dividend announcements do. Consistent with this interpretation, we find that foreign loan exposure had a significant impact on the pricing of U.S. bank stocks during the years 1982 and 1983, but that the stock prices adjusted continually over the two-year period rather than jumping on a few particular days.     

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.     

Diversification and the cost of debt of bank holding companies

In this study, we investigate the relationship between various dimensions of diversification and the cost of debt for publicly traded bank holding companies (BHCs). We find that both domestic geographic diversification of deposits and diversification of assets lead to a lower bond yield-spread. Diversification of non-traditional banking activities leads to a lower cost of debt only when yield-spread and diversification are estimated simultaneously. In addition, we find that medium-sized BHCs experience a greater reduction in bond yield-spread than small-sized and large-sized BHCs. This is consistent with the too-big-to-fail (TBTF) effects in the banking industry. Furthermore, we document that the association between diversification and yield-spread is bidirectional with higher yield-spreads being associated with greater asset and activity diversification and lower geographic deposit dispersion. The effect of diversification on bond yield-spread is robust after accounting for cross-sectional and serial correlation, and the endogeneity of diversification.     

Effects of earnings management on bank cost of debt

This study investigates how earnings management influences credit ratings, and thus the cost of debt, using bank data from 85 countries. Using cross‐country data also facilitates the investigation of how information asymmetry affects the influence of earnings management on ratings. The results indicate that raters downgrade ratings when they perceive earnings management, after controlling for other potential determinants of bank credit ratings, implying that earnings management increases borrowing costs. The negative effect of earnings management is mitigated for banks in countries with more extensive and effective banking regulations owing to lower information asymmetry, but aggravated in counties with less robust banking regulations.     

The impact of competition on bank orientation

How do banks react to increased competition? Recent banking theory significantly disagrees regarding the impact of competition on bank orientation—i.e., the choice of relationship-based versus transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank–firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.     

The determinants of the duration of commercial bank debt renegotiation for sovereigns

This paper examines the duration of commercial bank debt reschedulings for sovereigns. We show that the length of the first part of the rescheduling process, in which major creditor banks and the debtor country participate, is significantly affected by only the scale of rescheduling. However, the length of the second part of the process, where all the creditor banks in the syndicate are involved, is significantly affected by maturity, debt/GNP, debt/exports, GNP growth during the renegotiation process, and the presence of exit bonds and early participation fees. We also find that the time elapsed significantly increases the instantaneous probability of completion of the first part of the process.     

The impact of junior debt issuance on senior unsecured debt’s risk premiums

Numerous studies have examined the impact of security issuance upon the value of pre-existing debt and equity but the focus has largely been on changes in equity value. We examine changes in senior unsecured debt risk premiums that accompany new junior debt issues. Additionally, we test several hypotheses regarding the potential impacts of junior debt issues. Extant theory suggests senior debt value may be threatened under certain conditions by the issuance of junior debt. Our results indicate that when junior debt replaces bank debt, senior default risk premiums experience abnormal declines. The result is broadly consistent with the elevation of the senior unsecured debt by way of the elimination of a separate and more senior class of debt claimants. In contrast, we also find that larger junior bond issues are associated with abnormal increases in senior risk premiums, broadly consistent with issue size being correlated with negative information about firm cash flows. We find strong evidence of interaction effects. For example, replacement of bank debt results in greater changes in default risk premiums the larger the issue size. We also find lower credit ratings magnify other effects. For example, if the junior debt issued matures before the outstanding senior unsecured bond, senior risk premiums experience abnormal increases for lower rated debt.     

The market for shareholder voting rights around mergers and acquisitions: Evidence from institutional daily trading and voting

This paper explores the market for voting rights and shareholder voting around 350 mergers and acquisitions between 1999 and 2005 by examining institutional-investor trading and voting outcomes. Our results show institutions in aggregate buy shares and hence voting rights before merger record dates. This trading is not related to proxies for merger arbitrage or trading around merger announcements, and thus is not simply a continuation of the latter. Trading and buying before record dates are positively related to voting turnout and negatively related to shareholder support of merger proposals. We explore several possible interpretations of these results.     

Intellectual property rights reform and the cost of corporate debt

This paper investigates the role of intellectual property rights (IPR) protection on the cost of bank loans for firms in 48 countries. Using substantial reforms of patent rights as a source of identifying variation, the paper provides strong evidence that borrowers from countries that underwent IPR reform experience significant reductions in the cost of bank debt. Importantly, the effects of IPR reform on loan rates are significantly larger in industries that are more IP-intensive. Additional analysis shows that in the wake of reforms borrowers obtain larger size loans, which indicates that improvements in IPR are associated with greater credit availability. IPR reform also increases foreign lenders participation in loan syndicates. Overall, these findings suggest that legal protection afforded to intellectual property has a significant impact on the cost of corporate borrowing and the ability of innovative firms to raise debt capital.     

Terrorism and its impact on the cost of debt

We extend the literature on the costs of terrorism by examining its long-term impact on financial markets, an underdeveloped strand of research within the terrorism construct. Specifically, we look at its effect on the sovereign risk of 102 countries (a much broader sample than examined before), which forms the basis of the cost of debt in those countries, postulating that it results in a lower credit rating and that this impact is more pronounced in developing as opposed to developed markets. In operationalizing the risk of terrorism, we utilize the Institute for Economics and Peace's Global Terrorism Index, the most comprehensive index constructed to date which incorporates both the economic and social dimensions of terrorism and is based on the Global Terrorism Database covering 104,000 documented incidents. The results of the study support the hypothesis that terrorism results in a higher cost of debt for sovereigns and by extension, firms in impacted countries. In fact, a two-point increase in terrorism on the utilized 10-point scale on average results in a half notch reduction in a sovereign's credit rating, roughly equivalent to a change in outlook. Furthermore, this impact is more pronounced in developing markets where we find that a comparable two-point increase in terrorism on average results in an entire notch downgrade in the sovereign credit rating, e.g., from BB to BB-. Finally, we find that our model demonstrates predictive power on an out-of-sample basis and as such, could be useful for investors seeking to construct more efficient diversified asset portfolios.     

Board quality and the cost of debt capital: The case of bank loans

We analyze the relation between comprehensive measures of board quality and the cost as well as the non-price terms of bank loans. We show that firms that have higher quality boards with a greater advisory presence borrow at lower interest rates. This relation exists even after controlling for ownership structure, CEO compensation policy, and shareholder protection, as well as the size and financial characteristics of the borrower and of the loan. We also show evidence that board quality and other governance characteristics influence the likelihood that loans have covenant requirements, but the relations differ by covenant type. When we combine the direct and indirect costs of bank loans we find that firms with large, independent, experienced, and diverse boards and lower institutional ownership borrow more cheaply. Overall, the evidence indicates that board quality impacts the cost of bank debt.     

Corporate groups,dual-class shares and the value of voting rights

It is known that deviating from the one-share–one-vote principle through the issue of non-voting stock increases the value of outsiders' voting rights. We argue that the creation of a business group is another way to deviate from one-share–one-vote and we show that it produces a larger voting-share premium in holding companies. As a consequence, having both subsidiaries and non-voting stock produces a multiplier effect on the voting premium. The puzzling size of the premium in Italy was never related to the interaction of pyramiding and non-voting stock. Our empirical study confirms that the premium is larger for holding companies issuing non-voting stock than for similar operating companies without non-voting equity.