Institutions and Corporate Reputation: Evidence from Public Debt Markets
Xian Gu, Iftekhar Hasan, Haitian Lu
Journal of Business Ethics,
No. 1,
2023
Abstract
Using data from China’s public debt markets, we study the value of corporate reputation and how it interacts with legal and cultural forces to assure accountability. Exploring lawsuits that change corporate reputation, we find that firms involved in lawsuits experience a decrease in bond values and a tightening of borrowing terms. Using the heterogeneities in legal and social capital environments across Chinese provinces, we find the effects are more pronounced for private firms, firms headquartered in provinces with low legal protections, and firms headquartered in provinces with high social capital. The results show that lawsuits that allege misconduct are associated with reputational penalties and that such penalties serve as substitutes for legal protections and as complements to cultural forces to provide ex post accountability and motivate ex ante trust.
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To Securitize or To Price Credit Risk?
Danny McGowan, Huyen Nguyen
Journal of Financial and Quantitative Analysis,
No. 1,
2023
Abstract
Do lenders securitize or price loans in response to credit risk? Exploiting exogenous variation in regional credit risk due to foreclosure law differences along US state borders, we find that lenders securitize mortgages that are eligible for sale to the Government Sponsored Enterprises (GSEs) rather than price regional credit risk. For non-GSE-eligible mortgages with no GSE buyback provision, lenders increase interest rates as they are unable to shift credit risk to loan purchasers. The results inform the debate surrounding the GSEs' buyback provisions, the constant interest rate policy, and show that underpricing regional credit risk increases the GSEs' debt holdings.
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02.02.2023 • 2/2023
Economic growth, public finances and greenhouse gas emissions in the medium term
According to the Halle Institute for Economic Research (IWH) and its medium-term projection of the German economy, growth in the next six years will be about the same as in the past six years, at 1% per year. The national budget will remain in deficit, but the debt level will decline again relative to the gross domestic product (GDP) from 2024 onwards. At this rate of economic expansion, greenhouse gas emissions will continue to decline in the medium term, but at a much slower rate than necessary to meet the national emission reduction targets.
Oliver Holtemöller
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The Geography of Information: Evidence from the Public Debt Market
Bill Francis, Iftekhar Hasan, Maya Waisman
Journal of Economic Geography,
No. 1,
2023
Abstract
nWe investigate the link between the spatial concentration of firms in large, central metropolitans (i.e. urban agglomeration) and the cost of public corporate debt. Looking at bond issues over the period 1985–2014, we find that bonds issued by companies headquartered in urban agglomerates have lower at-issue yield spreads than bonds issued by firms based in remote, sparsely populated areas. Measures of the count of institutional bondholders in a firm’s vicinity confirm that the spatial cross-sectional variation in bond spreads is driven by the proximity of metropolitan firms to large concentrations of institutional investors. Our results are robust to controls for firm productivity and governance, analyst following, and exogenous shocks to institutional investor attention. The effect of headquarters location on bond spreads is especially pronounced for more difficult to value, speculative-grade bonds, bonds issued by smaller, less visible firms and bonds issued without protective covenants. Overall, we provide evidence that the geographical distribution of firms and investors generates a corresponding distribution of value-relevant, firm-level information that affects its cost of capital.
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Corporate Culture and Firm Value: Evidence from Crisis
Yiwei Fang, Franco Fiordelisi, Iftekhar Hasan, Woon Sau Leung, Gabriel Wong
Journal of Banking and Finance,
January
2023
Abstract
Based on the Competing Values Framework (CVF), we score 10-K text to measure company culture in four types (collaborative, controlling, competitive, and creative) and examine its role in firm stability. We find that firms with higher controlling culture fared significantly better during the 2008–09 crisis. Firms with stronger controlling culture experienced fewer layoffs, less negative asset growth, greater debt issuance, and increased access to credit-line facilities during the crisis. The positive effect of the controlling culture is stronger among the financially-constrained firms. Overall, the controlling culture improves firm stability through greater support from capital providers.
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Surges and Instability: The Maturity Shortening Channel
Xiang Li, Dan Su
Journal of International Economics,
November
2022
Abstract
Capital inflow surges destabilize the economy through a maturity shortening mechanism. The underlying reason is that firms have incentives to redeem their debt on demand to accommodate the potential liquidity needs of global investors, which makes international borrowing endogenously fragile. Based on a theoretical model and empirical evidence at both the firm and macro levels, our main findings are twofold. First, a significant association exists between surges and shortened corporate debt maturity, especially for firms with foreign bank relationships and higher redeployability. Second, the probability of a crisis following surges with a flattened yield curve is significantly higher than that following surges without one. Our study suggests that debt maturity is the key to understand the financial instability consequences of capital inflow bonanzas.
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Corporate Governance Benefits of Mutual Fund Cooperation
Rex Wang Renjie, Patrick Verwijmeren, Shuo Xia
IWH Discussion Papers,
No. 21,
2022
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making. We present evidence that dual ownership allows financially distressed firms to increase investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. As such, dual ownership reduces shareholder-creditor conflicts, especially when families encourage cooperation among their managers. Overall, our results suggest that mutual fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
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Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
Stefan Eichler, Ju Hyun Pyun
Journal of Economic Behavior and Organization,
May
2022
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
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On Modeling IPO Failure Risk
Gonul Colak, Mengchuan Fu, Iftekhar Hasan
Economic Modelling,
April
2022
Abstract
This paper offers a novel framework, combining firm operational risk, IPO pricing risk, and market risk, to model IPO failure risk. By analyzing nearly a thousand variables, we observe that prior IPO failure risk models have suffered from a major missing-variable problem. Evidence reveals several key new firm-level determinants, e.g., the volatility operating performance, the size of its accounts payable, pretax income to common equity, total short-term debt, and a few macroeconomic variables such as treasury bill rate, and book-to-market of the DJIA index. These findings have major economic implications. The total value loss from not predicting the imminent failure of an IPO is significantly lower with this proposed model compared to other established models. The IPO investors could have saved around $18billion over the period between 1994 and 2016 by using this model.
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The Effects of Sovereign Risk: A High Frequency Identification Based on News Ticker Data
Ruben Staffa
IWH Discussion Papers,
No. 8,
2022
Abstract
This paper uses novel news ticker data to evaluate the effect of sovereign risk on economic and financial outcomes. The use of intraday news enables me to derive policy events and respective timestamps that potentially alter investors’ beliefs about a sovereign’s willingness to service its debt and thereby sovereign risk. Following the high frequency identification literature, in the tradition of Kuttner (2001) and Guerkaynak et al. (2005), associated variation in sovereign risk is then obtained by capturing bond price movements within narrowly defined time windows around the event time. I conduct the outlined identification for Italy since its large bond market and its frequent coverage in the news render it a suitable candidate country. Using the identified shocks in an instrumental variable local projection setting yields a strong instrument and robust results in line with theoretical predictions. I document a dampening effect of sovereign risk on output. Also, borrowing costs for the private sector increase and inflation rises in response to higher sovereign risk.
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