Multinationals, Hedging, and Capital Structure under Exchange Rate Uncertainty

This paper examines the interplay of the financing and hedging decisions of a risk-averse multinational firm having a wholly-owned foreign subsidiary. Exchange rate risk management of the multinational firm is shown to have direct impacts on its international capital structure decision and on its currency of denomination decision. If a currency forward market exists, the multinational firm will devise its international capital structure so as to minimize the global weighted average cost of capital. Or else the multinational firm has to rely on a money market hedge through issuing more foreign currency denominated debt and less domestic currency denominated debt, thereby resulting in a higher global weighted average cost of capital. JEL Classification Numbers: D81, F23, G32     

Self-Fulfilling Currency Crises with Borrowing Constraints and Domestic Currency Debt

This paper presents a model of self-fulfilling currency crises in economies that do not suffer from domestic liability dollarization but whose international borrowing is subject to a collateral constraint. The model shows that when the collateral is a non-traded asset the expectation of a real exchange rate depreciation may trigger the constraint and cause a crisis in which the capital outflow and the real depreciation reinforce each other. Since in the model debt is denominated in domestic currency this paper highlights that borrowing constraints can cause self-fulfilling currency crises even in the absence of foreign-currency debt.     

Banking and Debt Crises in Europe: The Dangerous Liaisons?

The potential mutation of the Sub-Prime banking crisis into a sovereign debt one in Euro area countries is investigated. After reviewing the criteria used to measure the debt vulnerability, the balance sheet approach is presented in order to illustrate the potential connections between these two types of crises. A graphical analysis yields evidence that at the end 2009 the probability of observing a Euro area country defaulting is less likely than six month before. Nevertheless, the serious threats, which concern Greece and Ireland, do not permit us to exclude the occurrence of a contagious, or self-fulfilling, sovereign debt or currency crises in Euro area in the future.     

The Effect of Changes in Income Shifting on Affiliate Managers' Internal Reporting Decisions*†

This study examines the interplay between tax and internal reporting incentives among affiliates of multinational corporations (MNCs). MNCs face limited information flows that may prevent affiliates' performance metrics to be responsive immediately to changes in the firm's tax planning. Using granular data of affiliates belonging to MNCs from 21 European countries, our study provides new empirical evidence of affiliate internal reporting responses induced by changing tax plans. When high-tax-rate countries tighten income shifting rules, we first document that income shifting is reduced and low-tax-rate affiliates have less income. Second, we predict and document that managers of these low-tax-rate affiliates offset this decrease in profits by managing upwards a key performance metric: affiliate earnings. Our results are consistent with firms not quickly adjusting the affiliate managers' incentives in the face of changing tax planning strategies, and affiliates managing reported earnings to offset the effect of changes in the tax planning of the firm. Cross-sectional analyses provide further evidence consistent with the theory underlying the main tests. The results support the policy of tightening income shifting rules when the objective is to reduce income shifting, and firms' central management would benefit from considering the implications of changing tax plans on the assessment of local managers.     

CURRENCY CRISES IN EMERGING MARKETS: THE CASE OF POST‐LIBERALIZATION TURKEY

This article investigates the determinants of currency crises in Turkey. It analyzes the two major currency crises of 1994 and 2000–2001 in the light of the existing theoretical models. The present study uses logit, probit, and limited dependent models to explain the currency crises in the post–capital account liberalization era. The results obtained from the three approaches are generally consistent and the coefficients obtained for the explanatory variables generally have the same sign. The findings suggest that the currency crises in Turkey are associated with global liquidity conditions, fiscal imbalances, capital outflows, and banking sector weaknesses.     

Why are currency crises contagious? A comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998

Why Are Currency Crises Contagious? A Comparison of the Latin American Crisis of 1994–1995 and the Asian Crisis of 1997–1998.—This paper analyzes three channels through which currency crises are transmitted between countries: contagion based on unsustainable economic fundamentals; contagion resulting from herding behaviour in financial markets; contagion induced by close trade integration. The presented model that links currency crises with these three types of contagion is employed to analyze the transmission of the Mexican crisis in 1994–1995 and the Thai crisis in 1997 to other emerging economies. The empirical results show that, first, the most important contagion channels were based on close financial and trade integration rather than on the weakness of macroeconomic fundamentals. Second, the vulnerability to capital flow reversals and weak financial sectors made countries particularly prone to a currency crisis, while external imbalances and currency misalignments were much less important. JEL no. F30, E60, E65, E44     

The Simple Analytics of Sudden Stops

Currency crises in emerging and developing countries have often been characterized by “sudden stops” of capital flows. A variety of mechanisms have been adduced to explain the emergence of this phenomenon. This paper integrates these mechanisms into a simple and transparent analytical model in which currency mismatches, large current account deficits, and large stocks of short-term debt interact with low reserve stocks to generate dual equilibria. In this context, the “panic” equilibrium is characterized by a currency crisis, a sudden stop, and an output collapse. The potential for various policies to avoid this outcome is explored, as are the implications of the analysis for reserve accumulation.     

Nonlinear Capital Flow Tax: Capital Flow Management and Financial Crisis Prevention in China

How to promote capital account liberalization while preventing financial crises is a challenging task for policymakers. This study proposes a nonlinear (progressive) capital flow tax as a solution. We first demonstrate that the collateral requirement of international borrowing can give rise to multiple equilibria and self‐fulfilling financial crises. We then show that the crisis equilibrium characterized by large exchange rate depreciation, capital flight and welfare loss can be eliminated by imposing a nonlinear (progressive) tax scheme on capital outflows with the marginal tax rate increasing with the size of individual capital outflows. The implementation of such a tax scheme in China is also discussed.     

Long-term evolution of the firm value and behavior of business groups: Korean chaebols between weak premium,strong discount,and strong premium

This paper analyzes the long-term evolution of the costs and benefits associated with chaebols or diversified business groups in Korea. Chaebol-affiliated firms in Korea have experienced dramatic changes in their costs and benefits along three time periods (1984–1988, 1990–1995, and 2001–2005). They did not suffer a value loss relative to non-affiliated firms in the 1980s, but did so in the 1990s. In the post-crisis period, however, they began to show value gains.To identify the causes of these changes, we examine if chaebol firms prioritize profit stability over profit maximization, overinvest in low-return businesses, cross-subsidize the low-performing affiliates of their group, and possess greater debt capacity, consequently enjoying lower tax burdens. We discover that in the 1980s, chaebol firms generally enjoyed various perks, such as tax breaks, but shied away from excessive investment activities. In the 1990s, their performance worsened because of substantial over-investment, despite several advantages. However, after massive restructuring and sorting out following the 1997 Asian financial crisis, chaebols emerged as very profitable firms correcting over-investment despite the absence of tax perks and debt-carrying advantages.     

DOLLARIZATION OF DEBT CONTRACTS: EVIDENCE FROM CHILEAN FIRMS

This paper uses a new data set to estimate the causes and consequences of foreign currency debt in firms' balance sheets. The evidence from this sample of Chilean firms indicates that dollar‐denominated debt increases with firms' size and degree of exposure to foreign competition. We find evidence that dollar‐denominated debt combines with exchange rate movements to produce a negative balance‐sheet effect that reduces firms' investment in periods of strong exchange rate depreciation. This negative balance‐sheet effect is associated with long‐term debt and appears to be nonlinear in the amount of real exchange rate depreciation.     

Nominal debt and inflation stabilization

The “fiscal theory of currency crises” ( Daniel 2001 ; Corsetti and Ma?kowiak 2005, 2006 ) claims that with long‐term nominal debt, a government can delay the timing of an inevitable currency crisis that results from a fiscal shock. The present paper shows that, in contrast, long‐term nominal debt might have destabilizing effects when a government introduces an inflation stabilization policy. It is shown that a stabilization policy that is successful in the absence of long‐term nominal debt can cause a crisis when long‐term nominal debt exists. The model implies that a government with a large stock of long‐term nominal debt must overcome a high fiscal hurdle for a successful stabilization policy. This difficulty is avoidable if long‐term debt is indexed to inflation.     

Currency boards as a path towards the Eurozone: lessons from the Baltics

In the early 1990s, the three Baltic states adopted de jure (Estonia 1992, Lithuania 1994) or de facto (Latvia) currency boards. After operating under boards for two decades, Estonia (2011), Latvia (2014) and Lithuania (2015) exited to the Eurozone. The paper takes a qualitative look at their experience through the lens of the currency board literature. Viewed over the entire period of operation, the boards delivered on the inflation stabilization objective with little evidence of a growth or trade penalty. The high average performance was however accompanied by high volatility on both the nominal and the real side. While the boards avoided both currency and sovereign debt crises, they contributed to vulnerabilities, notably the 2004–2010 boom-bust cycle. The Baltic experience re-enforces policy lessons from earlier crisis under fixed exchange rates: vigilance and timely response to incipient vulnerabilities associated with short-term capital-inflows and over-heating.     

Corporate Taxes and Financing Methods for Taxable Acquisitions*

We examine the influence of corporate taxes on U.S. firms' financing methods for taxable acquisitions of 100 percent of a target corporation's stock. We conduct tests of acquirer firms' use of debt or internal funds as the funding source for these acquisitions over the period 1987‐97. Our results provide the first empirical evidence that U.S. firms' use of debt to fund acquisitions significantly declines as foreign tax credit limitations reduce the marginal tax benefits received from borrowing. This finding is consistent with earlier speculation that U.S. foreign tax credit provisions could materially affect the capital costs of U.S. companies in debt‐financed acquisitions. We also find that these firms are generally high‐tax‐rate corporations whose financing choices are not significantly influenced by whether they acquire target‐firm tax loss carryovers. Our findings contribute to the accounting literature on the influence of taxes on the structure and financing of corporate acquisitions.     

Assessing foreign direct investment relationships between China,Japan, and the United States

China has received enormous inflows of foreign direct investment (FDI) in recent years, including significant flows from Japan and the US. We examine these investment flows in detail to gain perspectives on their relative importance for the three countries involved. We also analyze the industrial composition of FDI flows over time. American FDI flows to China have been less concentrated in manufacturing than average for investors in China while Japan's FDI flows have been much more concentrated in manufacturing, particularly in transport, electrical and machinery industries in recent years. Using survey data from American and Japanese affiliates, we compare the employment patterns and sales destinations of American and Japanese affiliates in China. We find a much higher degree of export-orientation for Japanese affiliates than American affiliates, with the latter tending to make the vast majority of their sales in the Chinese market. Over time, however, we find a tendency towards convergence in the sales destinations of Japanese and American affiliates.     

Why clashes between internal and external stability goals end in currency crises, 1797–1994

We argue that recent currency crises reflect clashes between fundamentals and pegged exchange rates, just as did crises in the past. We reject the view that crises reflect self-fulfilling prophecies that are not closely related to measured fundamentals. Doubts about the timing of a market attack on a currency are less important than the fact that it is bound to happen if a government's policies are inconsistent with pegged exchange rates. We base these conclusions on a review of currency crises in the historical record under metallic monetary regimes and of crises post-World War II under Bretton Woods, and since, in European and Latin American pegged exchange rate regimes.     

Debt Covenant Restriction,Financial Misreporting,and Auditor Monitoring*

Theory suggests that financial report-based debt covenants engender incentives for the manager to relax covenant constraints through accounting choices in order to avoid costly covenant violations. Prior studies directly testing this hypothesis in the context of financial misreporting fail to find consistent evidence. Using a more refined measure of debt covenant restriction, we find that debt covenant restriction is positively associated with the probability of financial statement misstatements. This positive association is driven by performance covenants rather than capital covenants and is more consistent with the manager striving to avoid a “false-positive” violation than to delay the violation. Our results also imply that managers resort to both income-increasing and non–income-increasing misreporting to relieve covenant constraints and rely more on the latter when faced with greater earnings management constraints. Additionally, the auditor charges higher audit fees to firms with more binding covenants even outside the violation state, and audit fees increase with constraints relative to both performance and capital covenants, reflecting greater financial reporting risk and bankruptcy risk, respectively. Within capital covenants, we find some evidence of even higher audit fees for tighter intangible-inclusive versus intangible-exclusive capital covenants. Lastly, our evidence suggests that the positive association between covenant constraints and misreporting is attenuated when the auditor has more experience with debt covenants, has greater bargaining power over the client, or faces greater litigation risk.     

Debt policy under constraints: Philip II,the Cortes,and Genoese bankers

Under Philip II, Castile was the first country with a large nation‐wide domestic public debt. A new view of that fiscal system is presented that is potentially relevant for other fiscal systems in Europe before 1800. The credibility of the debt, mostly in perpetual redeemable annuities, was enhanced by decentralized funding through taxes administered by cities making up the Realm in the Cortes. The accumulation of short‐term debt depended on refinancing through long‐term debt. Financial crises in the short‐term debt occurred when the service of the long‐term debt reached the revenues of its servicing taxes. They were not caused by liquidity crises and were resolved after protracted negotiations in the Cortes by tax increases and interest rate reductions.     

Is there any gain from social security privatization?

Increasing calls for a social security reform of switching from the pay-as-you-go (PAYG) system to a funded system has been seen in recent decades. This paper examines the effect of this reform on capital accumulation and the welfare of each generation. Three methods are used to finance the pension debt, government debt financing, tax financing, and government asset financing. With government debt or tax financing, the market equilibrium remains unchanged and all generations are as well off in the new system as in the PAYG system. Thus, switching from the PAYG system to a funded system is neutral. With government asset financing, the interest rate will decrease, private capital will increase, but the total output may either increase or decrease. The welfare effect is also ambiguous in general, depending on the rate of return of government assets. With plausible parameters, our simulation shows that the reform will lower the interest rate, increase private capital, and lower government capital in the short run, but raise government capital and increase output in the long run.     

融资结构、债务差异、扩张能力与汽车制造业上市公司绩效

汽车制造业上市公司融资结构表现为债务融资水平偏高。长期债务融资比重偏低、短期债务融资水平过高加重了企业破产风险。债务融资水平与企业盈利能力、营运能力、资本扩张能力呈正向协同趋势;长期债务融资比重与企业盈利能力和股本扩张能力呈正向协同趋势,而与企业营运能力呈负向变化趋势。应发展债券市场、完善资本市场立法、推动国有股减持和民营资本介入、适应产融结合趋势、降低资产负债率、提高长期融资比重以发挥债务融资的正面效应。     

The market for corporate subsidiaries in Japan: An empirical study of trades among listed firms

We investigate trades of wholly- or partially-owned subsidiaries between firms listed on the Tokyo Stock Exchange (TSE) for the years 1996–2010, to explore the economic impact in terms of strategic refocusing, stock market valuation and performance effects. By pairing both sides to each deal, we show differences in firm characteristics, returns, and subsequent performance of buying and selling firms. Unlike mergers between whole firms, most subsidiary deals straddled different industries. Most sellers were larger, more diversified and less profitable than buyers. Our event study reveals that abnormal returns were positive for buyers yet insignificantly different from zero for sellers. However, subsidiary sales in the core business earned negative returns, the more so the larger the deal. An analysis of ex-post operating results shows that the performance of sellers often declined after the trade, in particular for firms that divested a core-related subsidiary. We conclude that subsidiary trades in Japan in this period contributed importantly to strategic repositioning and a more efficient use of corporate assets.