Evaluating corporate credit risks in emerging markets

Corporate leverage among emerging market firms went up considerably after the 2007–09 Global Financial Crisis (GFC). We investigate how the increased emerging market corporate leverage in the post-GFC period (2010–15) impacted the underlying credit risk, compared to the pre-GFC (2002–2006) and GFC (2007–09) periods. Using firm-level credit risk, financial, and balance sheet data for 350 firms in 23 emerging markets, we find that leverage growth leads to a significant increase in corporate credit default swap (CDS) spreads only in the post-GFC period, and the incremental effect is mainly evident among risky firms (firms with high leverage and idiosyncratic volatility). In contrast, emerging market CDS spreads during the GFC period are mainly driven by global market risk factors. The post-GFC corporate debt vulnerability is mitigated for high growth prospect firms and firms domiciled in countries with high net capital inflows and superior governance. While corporate leverage growth impacts aggregate corporate credit risk, there is no evidence that it increases sovereign credit risk. Our paper contributes to the recent literature on potential sources of default risk in emerging markets.     

Carbon policy risk and corporate capital structure decision

This study examines the relationship between carbon policy risk and corporate capital structure in China. Using a sample of A-share listed firms from 1997 to 2018, we find that carbon policy risk reduces firms' financial leverage. The result is robust to the introduction of difference-in-differences tests, instrumental variable regression, and a placebo test used to address endogeneity, as well as to other tests of alternative measures. This negative relationship is more pronounced for non-state-owned enterprises, firms with low institutional investor ownership, firms with poor corporate social responsibility performance, firms belonging to competitive or carbon-sensitive industries, and firms located in provincial cities. Financing constraints, bankruptcy risk, and government power are potential mechanisms underlying this observation. Our findings provide practical suggestions through which firms can address carbon policy risk and provide guidance to governments and regulators for the further implementation of environmental policies.     

Shareholder litigation rights and capital structure decisions

We exploit the staggered adoption of the universal demand (UD) laws across U.S. states, which impedes shareholder rights to initiate derivative lawsuits, as a quasi-natural experiment to examine the relation between shareholder litigation rights and firm capital structures. We find that weaker shareholder litigation rights due to the UD laws adoption lead to higher financial leverage, which enhances firm value. Furthermore, the positive relation between the UD laws adoption and financial leverage is more pronounced for firms exposed to higher shareholder litigation risk ex ante or financially constrained firms. Our evidence is consistent with lower shareholder litigation threats motivating firms to increase financial leverage.     

失业保险与公司财务杠杆

我国劳动力市场化程度日益加深导致劳动者职业转换愈加频繁,失业保险的作用日益突出。本文探究了失业保险金水平对企业财务杠杆的影响。运用2009—2019年上市公司数据进行实证分析,结果发现失业保险金上升会导致公司财务杠杆下降。渠道检验显示,提高失业保险金可以降低员工失业风险溢酬,公司劳动力成本下降,公司有更多自由现金流和盈利进行内源融资和偿还债务,公司财务杠杆下降。进一步分析发现,失业保险金的作用在失业率高的地区更加显著。主要结果在分别运用《社会保险法》和《关于调整失业保险金标准的指导意见》构造双重差分模型和工具变量解决内生性问题、更改模型设置、排除投资水平影响、删除特殊省份、更换样本期间后,依然成立。本文结果说明加大失业保险保障力度有助于降低企业财务风险。     

Corporate Stock and Bond Return Correlations and Dynamic Adjustments of Capital Structure

This paper analyses the effects of dynamic correlations between stock and bond returns issued by the same firm on the speed of adjustment towards target leverage. The results show that the estimated correlations are time varying, show persistence and differ among firms. Analysis of the potential explanatory variables reveals that the correlations decrease with negative expectations about future aggregate risks, but only for firms with a low default probability. In contrast, correlations are positively associated with specific risk measures, especially idiosyncratic stock risk and financial leverage. The positive relationship between the correlations and the leverage ratio suggests that target leverage can be achieved faster when the stock–bond correlation is high. Our results show that this is the case.     

RISK DIFFERENCES AND FINANCIAL REPORTING

Financial leverage as reported by a consolidated financial statement may differ substantially from leverage for the parent company. To assess the financial risk for the parent (not the consolidated entity), employing consolidated data is hazardous; the problem is magnified by the fact that virtually all firms report only consolidated data. Consolidated leverage almost always equals or exceeds parent leverage for a wholly owned subsidiary, and many firms reporting only consolidated data have betas significantly greater than otherwise comparable firms that report both consolidated and parent company information.     

Accounting for decarbonisation and reducing capital at risk in the S&P500

This article accounts for carbon emissions in the S&P 500 and explores the extent to which capital is at risk from decarbonising value chains. At a global level it is proving difficult to decouple carbon emissions from GDP growth. Top-down legal and regulatory arrangements envisaged by the Kyoto Protocol are practically redundant given inconsistent political commitment to mitigating global climate change and promoting sustainability. The United Nations Environment Programme (UNEP) and European Commission (EC) are promoting the role of financial markets and financial institutions as drivers of behavioural change mobilising capital allocations to decarbonise corporate activity.     

A tale of two Us: Corporate leverage and financial asset allocation in China

Firms choose to make liquid and illiquid financial investments due to different motives and, therefore, how they relate to corporate leverage may exhibit different non-linear shapes. On the one hand, firms hold liquid financial assets to hedge against external uncertainty and liquidity shocks based on the “precautionary saving” motive. This implies a positive U-shaped relationship between the leverage ratio and liquid financial asset allocation. On the other hand, firms allocate illiquid financial assets due to the “investment substitution” motive to earn high yields. This leads to an inverted U-shaped relationship between the leverage ratio and illiquid financial asset holdings. Using financial data of Chinese listed firms from 2007 to 2017, we verify the above theoretical predictions. Further analysis finds factors such as internal and external risks, financing environment, and total factor productivity to be important determinants of corporate financial asset allocation.     

Firm dynamics and financial development

Using comprehensive firm-level datasets, this paper studies the impact of cross-country variation in financial market development on firms' financing choices and growth. In less financially developed economies, small firms grow faster and have lower leverage than large firms. As financial development improves, the growth difference between small and large firms shrinks, while the leverage difference rises. The paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk. The model explains the observed cross-country variations in firm size, leverage and growth in response to changes in financial frictions.     

Labor unemployment risk and corporate financing decisions

This paper presents evidence that firms choose conservative financial policies partly to mitigate workers' exposure to unemployment risk. We exploit changes in state unemployment insurance laws as a source of variation in the costs borne by workers during layoff spells. We find that higher unemployment benefits lead to increased corporate leverage, particularly for labor-intensive and financially constrained firms. We estimate the ex ante, indirect costs of financial distress due to unemployment risk to be about 60 basis points of firm value for a typical BBB-rated firm. The findings suggest that labor market frictions have a significant impact on corporate financing decisions.     

Risk-taking incentives of executive stock options and the asset substitution problem

Various theoretical models show that managerial compensation schemes can reduce the distortionary effects of financial leverage. There is mixed evidence as to whether highly levered firms offer less stock‐based compensation, a common prediction of such models. Both the theoretical and empirical research, however, have overlooked the leverage provided by executive stock options. In principle, adjusting the exercise prices of executive stock options can mitigate the risk incentive effects of financial leverage. We show that the near‐universal practice of setting option exercise prices near the prevailing stock price at the date of grant effectively undoes most of the effects of financial leverage. In a large cross‐sectional sample of Canadian option‐granting firms, we find evidence that executives' incentives to take equity risk are negatively rather than positively related to the leverage of their employers.     

OPERATING LEVERAGE AND UNDERINVESTMENT

Using a contingent claims model, we examine the impacts of both operating leverage and financial leverage on a firm's investment decisions in the context of capacity expansion. Our model shows that quasi‐fixed operating costs could significantly mitigate the underinvestment problem for debt‐financed firms. The existing debt induces equity holders to delay equity‐financed expansion because the expanded earnings base will also benefit the debt holders by lowering the bankruptcy risk. The operating costs decrease this type of wealth transfer from equity holders to debt holders by magnifying the bankruptcy risk of the existing debt upon investment. By applying the Cox proportional hazard model on a large sample of publicly traded U.S. firms over 1966–2016, we offer empirical support for the theoretical predictions. The results are robust to various measures of operating leverage.     

A resolution of the distress risk and leverage puzzles in the cross section of stock returns

We revisit findings that returns are negatively related to financial distress intensity and leverage. These are puzzles under frictionless capital markets assumptions but are consistent with optimizing firms that differ in their exposure to financial distress costs. Firms with high costs choose low leverage to avoid distress, but they retain exposure to the systematic risk of bearing such costs in low states. Empirical results are consistent with this explanation. The return premiums to low leverage and low distress are significant in raw returns, and even stronger in risk-adjusted returns. When in distress, low-leverage firms suffer more than high-leverage firms as measured by a deterioration in accounting operating performance and heightened exposure to systematic risk. The connection between return premiums and distress costs is apparent in subperiod evidence. Both are small or insignificant prior to 1980 and larger and significant thereafter.     

Financial Crises and Recapitalizations

We develop a dynamic stochastic general equilibrium model with financial frictions on both financial intermediaries and goods‐producing firms. Since financial intermediaries are highly leveraged, we show that the welfare gains from their recapitalization in response to large but rare net worth losses are as large as those from eliminating typical business cycle fluctuations. We also find that these gains are increasing in the size of the net worth loss, are larger when recapitalization funds are raised from the household rather than the real sector, and can be larger when lower idiosyncratic risk leads to higher leverage.     

我们为什么需要绿色金融?——从全球经验事实到基于经济增长框架的理论解释

当前,绿色金融备受关注,然而该领域的基础理论尚需进一步强化。根据经济学的一般原理,由于污染的外部性问题,环保的主要力量应当是公共部门而非金融系统。然而为何越来越多国家选择发展绿色金融?其背后的经济学原理是什么?深入探讨这些问题是有效制定政策、构建绿色金融理论体系的基础。本文基于跨国面板数据的分析表明,绿色金融对经济增长具有显著的促进效应,表现出与公共部门环保投入的显著差异。在此基础上,本文构建基于经济增长框架的绿色金融理论模型,对经验事实给出理论解释。模型证明:绿色金融的成本分摊与风险分担功能使其具有独特的长期增长效应,是经济发展必然选择;绿色金融政策与绿色财政政策的协调配合是实现高质量发展的有效手段。本文从理论层面回答了“为什么需要绿色金融”这一问题,为绿色金融的经济学理论发展和政策分析提供了可借鉴的框架。     

经营风险与企业杠杆率

本文从理论和实证两方面考察企业经营风险将如何影响其杠杆率。其中,企业面临的经营风险被定义为在企业所属“年份×城市×二位行业”层面内除自身外其他所有企业资产收益率(ROA)的分布标准差。整体而言,当企业经营风险上升时,其投资和负债决策将更加保守,表现为资产负债表收缩和杠杆率下降。分债务期限来看,杠杆率的变化又可分为“规模效应”和“结构效应”,前者指向投资、负债决策的整体收缩,后者指向债务结构中短期负债占比的下降。经营风险上升时,杠杆率下降主要体现为短期债务的缩减;分所有制来看,非国有企业对经营风险的敏感度较强,国有企业对经营风险的敏感度较小,这与两类企业的融资难易程度相符。     

Predicting systematic risk: Implications from growth options

In accordance with the well-known financial leverage effect, decreases in stock prices cause an increase in the levered equity beta for a given unlevered beta. However, as growth options are more volatile and have higher risk than assets in place, a price decrease may decrease the unlevered equity beta via an operating leverage effect. This is because price decreases are associated with a proportionately higher loss in growth options than in assets in place. Most of the existing literature focuses on the financial leverage effect: This paper examines both effects. We show, with a simple option pricing model, the opposing effects at work when the firm is a portfolio of assets in place and growth options. Our empirical results show that, contrary to common belief, the operating leverage effect largely dominates the financial leverage effect, even for initially highly levered firms with presumably few growth options. We then link variations in betas to measurable firm characteristics that proxy for the fraction of the firm invested in growth options. We show that these proxies jointly predict a large fraction of future cross-sectional differences in betas. These results have important implications on the predictability of equity betas, hence on empirical asset pricing and on portfolio optimization that controls for systematic risk.     

Firm-level political risk and corporate leverage decisions

This study examines the effects of firm-level political risk on firm leverage decisions and speed of adjustment. We uncover that firm-level political risk has a negative impact on a firm's total and long-term leverage. We also find that firms facing high political risk tend to prefer debts with short-term maturity. However, firm-level political risk is positively related to debt specialisation, suggesting that firms are more inclined to adopt fewer debt types when they face high political risk. Further analysis reveals that firms with high political risk are associated with a faster speed of adjustment to target than those with low political risk. Our results are robust to endogeneity concerns and the effects of financial crisis.     

Preemption,leverage, and financing constraints

This paper investigates the interactions between preemptive competition and leverage in a duopoly market. We investigate both a case in which the firms have optimal financial structures, and a case in which financing constraints require firms to finance their investments by debt. Our findings are that the second mover always leaves the duopoly market before the leader, although the leader may exit before the follower's entry. The leverage effects of debt financing can increase the value of a firm and accelerate investment, even in the presence of preemptive competition. Notably, financing constraints can delay preemptive investment and improve firm values in preemptive equilibrium. Indeed, the leader's high leverage due to financing constraints can lower the first-mover advantage and weaken preemptive competition. Especially with strong first-mover advantage, the financing constraint effects can dominate the leverage effects. These findings are almost consistent with the empirical evidence, which shows that high leverage leads to competitive disadvantage and mitigates product market competition.     

The role of on- and off-balance-sheet leverage of banks in the late 2000s crisis

Extensive regulatory changes and technological advances have transformed banking systems to a great extent. Banks have reacted to the challenges posed by the new operating environment by creating new products and expanding their activities to some uncharted business areas. In this paper, we study how modern banking which gave birth to the off-balance-sheet leverage activities affected the risk profile of U.S. banks as well as the level of systemic risk before and after the onset of the late 2000s financial crisis. Towards this, we separate on- from off-balance-sheet leverage and capture the latter with different, yet complementary, measures which do not exist in the current literature. Special attention is paid on the deleveraging process that occurred in the banking market after the crisis erupted, which is an additional innovative feature of this study. Our findings reveal that leverage, both explicit and hidden off-the-balance-sheet, increases the individual risk of banking firms making them vulnerable to financial shocks. Reverse leverage, on the other hand, is beneficial for individual banks’ health, but is found to be harmful for financial stability. We also demonstrate that the banks which concentrate on traditional lines of business typically carry less risk compared to those involved with modern financial instruments.