Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.     

Relative Liquidity,Fund Flows and Short‐Term Demand: Evidence from Exchange‐Traded Funds

We show that highly liquid Exchange‐Traded Funds (ETFs), especially those that are more liquid than their underlying basket of securities (i.e., positive relative liquidity), are particularly attractive to investors. Using three definitions of liquidity, we find that relative liquidity predicts net fund flows, as well as inflows and outflows positively and significantly. We further document a liquidity clientele among institutional investors: (i) relative liquidity is significantly more important for short‐ than for long‐term investors; and (ii) relative liquidity is inversely related to investors’ average holding duration in the ETFs. These two findings provide evidence that relative liquidity encourages short‐term demand.     

Short‐Term Corporate Debt around the World

Short‐term corporate debt as a proportion of total debt issued by public firms varies greatly across countries, between 28% in the United States and 78% in China. This paper argues that the interaction between information asymmetry and legal protection of creditors is an important determinant of debt maturity. When short‐term debt plays a dual role as signaling and commitment devices, a reduction in information asymmetry has a larger impact on debt maturity when creditor rights are weaker. We find empirical support for this prediction using firm‐level data from 45 countries around the world.     

Liquidity or Credit Risk? The Determinants of Very Short‐Term Corporate Yield Spreads

Employing a comprehensive database on transactions of commercial paper issued by domestic U.S. nonfinancial corporations, we study the determinants of very short‐term corporate yield spreads. We find that liquidity plays a role in the determination of spreads but, somewhat surprisingly, credit quality is the more important determinant of spreads, even at horizons of less than 1 month. These results are robust across a variety of proxies for liquidity and credit risk, and have important implications for the literature on the modeling of corporate bond prices.     

Long‐ and Short‐Term Cost Efficiency Frontier Evaluation: Evidence from Spanish Local Governments*

This paper analyses the efficiency of Spanish local governments using non‐convex frontier methods. More specifically, it analyses the total cost inefficiency and proposes its decomposition into three additive components: short‐term variable cost inefficiency; capacity utilisation of fixed inputs; and scale inefficiency. The second and third components correspond to the long‐term cost efficiency notion. The proposition is applied to a sample of Spanish municipal councils (municipalities with over 2,000 inhabitants located in Catalonia, the Spanish north‐eastern region). The results confirm the existence of significant cost inefficiency coefficients related to both the long and short term.     

Debt,Liquidity Constraints,and Corporate Investment: Evidence from Panel Data

This paper presents evidence supporting the theory that problems of asymmetric information in debt markets affect financially unhealthy firms' ability to obtain outside finance and, consequently, their allocation of real investment expenditure over time. I test this hypothesis by estimating the Euler equation of an optimizing model of investment. Including the effect of a debt constraint greatly improves the Euler equation's performance in comparison to the standard specification. When the sample is split on the basis of two measures of financial distress, the standard Euler equation fits well for the a priori unconstrained groups, but is rejected for the others.     

Short‐ and Long‐Term Effects of Multimarket Trading

We analyze short‐ and long‐term effects of multimarket trading by examining the entries of multiple markets into transacting three ETFs, DIA, QQQ, and SPY. We find that large‐scale entries improve overall market quality, while small‐scale entries have ambiguous effects. Our results show that the competition effect dominates the fragmentation effect over a long horizon and that market fragmentation leads to a decline in trading costs. Further, we find that the order handling rules help mitigate the fragmentation effect and facilitate the competition effect. We do not find that multimarket trading harms price efficiency or increases price volatility.     

Financial Reporting Quality,Debt Maturity,and the Cost of Debt: Evidence from China

This paper investigates the influence of different financing channels—bond issuance or bank loans—as well as debt maturity and the quality of financial reporting on the cost of debt in China. The authors find that conservative accounting is an important characteristic of high-quality financial reporting that can reduce the cost of longer maturity debt such as bank loans and bonds. Even state-owned enterprises, which have fewer financial constraints than non-state-owned enterprises, benefit from accounting conservatism's ability to reduce financial costs. Moreover, the findings indicate that bond investors are concerned about the issuer's fundamentals, while banks are more likely to focus on the operation and bankruptcy risk of borrowers.     

Exploring the Agency Cost of Debt: Evidence from the ISS Governance Standards

Corporate governance is usually viewed in the context of strengthening shareholder rights and enhancing shareholders’ welfare. However, the impact of corporate governance on bondholders is much less understood. We explore how corporate governance influences the cost of debt financing. Using broad governance metrics encompassing fifty governance attributes reported by The Institutional Shareholder Services (ISS), we document that stronger corporate governance is associated with a higher cost of debt. As governance strengthens by one standard deviation, the cost of debt rises by as much as 11 %. The results are robust even after controlling for both firm-specific and issue-specific characteristics. Our results are important because they suggest that corporate governance has a palpable effect on critical corporate outcomes such as credit ratings and bond yields. More importantly, we show that, while corporate governance may mitigate the agency conflict between managers and shareholders, it appears to exacerbate the agency conflict between shareholders and bondholders (the agency cost of debt).     

Underwriting Syndicates and the Cost of Debt: Evidence from Chinese Corporate Bonds

This article examines the association between underwriting syndicates and the cost of debt based on a sample of Chinese corporate bonds during 2007–2013. We find strong evidence that there is a negative relationship between forming underwriting syndicates and the cost of debt. The cost of bonds is more likely to decrease when the syndicate has more members—specifically, more joint managers. Additionally, by measuring the information asymmetry using several methods, we observe that this negative relationship is more pronounced when the information asymmetry between issuers and bond investors is more serious. The above results are robust after controlling for the potential endogeneity by constructing instrumental variables based on the unique setting of China’s corporate bond market.     

The Impact of Liquidity on Debt Maturity After a Financial Crisis: Evidence from the Gulf Cooperation Council Region

This article contributes to the existent literature on corporate debt maturity by studying a new channel through which firms may mitigate the effects of a major economic downturn such as the 2008 global financial crisis. More specifically, using a sample of 208 listed firms in the Gulf Cooperation Council (GCC) region, we find that an increase in firms’ current ratios after the crisis is associated with an increase in long-term financing. We also find that a financially constrained firm can still access long-term financing if its current ratio after the crisis is beyond a specific threshold. Additionally, we highlight the differences in the typical drivers of debt structure between GCC countries and industries.     

The Cost of Short‐Selling Liquid Securities

Standard models of liquidity argue that the higher price for a liquid security reflects the future benefits that long investors expect to receive. We show that short‐sellers can also pay a net liquidity premium if their cost to borrow the security is higher than the price premium they collect from selling it. We provide a model‐free decomposition of the price premium for liquid securities into the net premiums paid by both long investors and short‐sellers. Empirically, we find that short‐sellers were responsible for a substantial fraction of the liquidity premium for on‐the‐run Treasuries from November 1995 through July 2009.     

Treasury Safety,Liquidity, and Money Premium Dynamics: Evidence from Debt Limit Impasses

Treasury securities enjoy a “money premium” because they are ultra-safe and liquid. However, during debt limit impasses, the safety and liquidity of Treasury securities temporarily deteriorate, eroding the money premium. Using past impasses, we find the money premium eroded by roughly six basis points across all Treasury securities and up to 50 basis points for the shortest maturities at the greatest risk of a delayed principal payment. Safety and liquidity each accounted for about half of the erosion. The deterioration of safety and liquidity also appears to interact, consistent with theories of default-driven liquidity risk and the information sensitivity of debt.     

How Banks Price Loans to Public‐Private Partnerships: Evidence from the European Markets

This article presents the findings of a recent analysis of the drivers of credit spreads in project finance loans to public‐private partnerships, or PPPs, an increasingly popular form of procurement worldwide. PPPs are project finance transactions in which project output is a function of government policy in fields such as health, transport, and education. Because of the controversy that now surrounds the use of private finance in PPPs, understanding the determinants of the cost of debt in such highly leveraged projects is of interest to policy makers as well as originators and participants in the transactions. Using a large sample of credit spreads on debt extended to PPP projects in Europe over the past 15 years, the authors' study reports that market risk is the only significant driver of PPP debt credit spreads in a large portfolio of PPP debt; at the same time, technical risks appear to be diversified “away” by the structuring of the projects. Most important, and contrary to standard debt pricing models, factors like loan size, maturity, and leverage do not show up as significant determinants of the cost of debt in PPPs, reflecting a high degree of confidence by lenders that loans will be repaid or recovered. These results support the view that the use of project finance in PPPs is premised on effective risk management as well as confidence in the private sector's ability to manage public projects.     

The Determinants of Long‐Term Corporate Debt Issuances

A significant proportion of the debt issued by investment‐grade firms has maturities greater than 20 years. In this paper we provide evidence that gap‐filling behavior is an important determinant of these very long‐term issues. Using data on individual corporate debt issues between 1987 and 2009, we find that gap‐filling behavior is more prominent in the very long end of the maturity spectrum where the required risk capital makes arbitrage costly. In addition, changes in the supply of long‐term government bonds affect not just the choice of maturity but also the overall level of corporate borrowing.     

Short‐Selling Bans Around the World: Evidence from the 2007–09 Crisis

Most regulators around the world reacted to the 2007–09 crisis by imposing bans on short selling. These were imposed and lifted at different dates in different countries, often targeted different sets of stocks, and featured varying degrees of stringency. We exploit this variation in short‐sales regimes to identify their effects on liquidity, price discovery, and stock prices. Using panel and matching techniques, we find that bans (i) were detrimental for liquidity, especially for stocks with small capitalization and no listed options; (ii) slowed price discovery, especially in bear markets, and (iii) failed to support prices, except possibly for U.S. financial stocks.     

Banks' Liquidity and the Cost of Liquidity to Corporations

We consider the liquidity shock banks experienced following the collapse of the asset‐backed commercial paper (ABCP) market in the fall of 2007 to investigate whether banks' liquidity conditions affect their ability to provide liquidity to corporations. We find that banks that borrowed more from the Federal Home Loan Bank system or the Federal Reserve's discount window following that liquidity shock passed a larger portion of their borrowing costs onto corporations seeking access to liquidity when compared to the precrisis period. This increase is larger among banks with a bigger exposure to the ABCP market, credit lines that pose more liquidity risk to banks, and borrowers that are likely dependent on the credit‐line provider. Our findings show that the crisis that affected the banking system had a negative effect not only on the price of credit to corporations, but also on the price corporations pay to guarantee access to liquidity.     

Liquidity and Pricing of Credit Default Swaps in Japan: Evidence from a Benchmark Index for Corporate Debt Claims

This article is a contribution towards the growing empirical literature on the relationship between liquidity and pricing of credit default swaps (CDSs). To the best of my knowledge, the article becomes the first to show that market liquidity does matter to CDS pricing in Japan, by looking into a sole benchmark index of CDS trading for investment-grade debt claims, or the Markit iTraxx Japan (MiJ). The impact of illiquidity on MiJ premia has declined since the International Swaps and Derivatives Association introduced new trade practices in April 2009. The liquidity of the MiJ has increased since the Japan Securities Clearing Corporation started operating as a central counterpart for the MiJ in July 2011. The price discovery ability of the MiJ has also increased since then.     

The Determinants of Execution Costs in Short‐Term Money Markets

Prior research attributes the observed negative relation between execution costs and trade size in opaque markets to two factors—information asymmetry and broker‐client relationships. We provide evidence that a trader's ex ante transaction price information and the relationship traders have with their brokers are both significant determinants of a trader's execution costs in an opaque market; however, traders who establish strong relationships with their brokers will achieve a greater reduction in execution costs than traders with ex ante transaction price information. We also find evidence that trade size has little explanatory power after controlling for a trader's ex ante transaction price information and broker‐client relationships.