Home About us Contact
|
Home About us Contact | ||
|
|
||
Debt Financing (debt + financing)
Selected AbstractsMERGERS UNDER UNCERTAINTY: THE EFFECTS OF DEBT FINANCING,THE MANCHESTER SCHOOL, Issue 5 2007M. PILAR SOCORRO In this paper, we consider a Cournot oligopoly with demand uncertainty, fixed costs and constant marginal costs. The demand uncertainty makes some mergers that would be unprofitable in a certain environment profitable in this model. However, socially advantageous mergers may be still unprofitable for the colluding firms, so public intervention may be needed. One possibility consists in subsidizing such mergers. However, the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies. The reason is that, given the limited liability effect, merging parties compete more aggressively, so the reduction in market quantity is mitigated. [source] Corporate Debt Financing and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2010Aloke (Al) Ghosh Abstract:, Our study establishes linkages between two extensively researched areas, debt financing and the quality of earnings. Debt can have a ,positive influence'on earnings quality because managers are likely to use their accounting discretion to provide private information about the firms' future prospects to lower financing costs. For high debt, it can also have a ,negative influence' on earnings quality as managers use accruals aggressively to manage earnings to avoid covenant violations. Using accruals quality as a proxy for earnings quality, we document a non-monotonic (curvilinear) relation between debt and earnings quality. The relationship is positive at low levels of debt and negative at high debt levels with an inflection point around 41%. Our results suggest that firms that rely heavily on debt financing might be willing to bear higher costs of borrowing from lower earnings quality because the benefits from avoiding potential debt covenant violations exceed the higher borrowing costs. [source] Effects of Concentrated Ownership and Owner Management on Small Business Debt Financing,JOURNAL OF SMALL BUSINESS MANAGEMENT, Issue 4 2007Zhenyu Wu Using unique data and a new powerful Monte Carlo-based statistical tool, we examine the effects of concentrated ownership and owner,management (CO-OM) on the creditor,shareholder agency conflicts in small firms. A significant CO-OM effect from the small business owner's view, but insignificant from the commercial lenders' perspective, is found. Special features of informational asymmetry problems in small firms with CO-OM are also highlighted. Theoretical and empirical contributions are made to the small business management and corporate governance literature. Findings obtained from this research have important implications for small business practitioners as well as researchers, and this study can serve as a reference for policymakers and institutional lenders to assist small firms in successfully raising money through debt financing. In addition, a new powerful methodology is introduced to deal with various potential statistical biases and can be further applied to this line of research. [source] Debt financing, soft budget constraints, and government ownership Evidence from China1THE ECONOMICS OF TRANSITION, Issue 3 2007Lihui Tian G32; G34; P34 Abstract Debt financing is expected to improve the quality of corporate governance, but we find, using a large sample of public listed companies (PLCs) from China, that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency. We find that bank lending facilitates managerial exploitation of corporate wealth in government-controlled firms, but constrains managerial agency costs in firms controlled by private owners. We argue that the failure of corporate governance may derive from the shared government ownership of lenders and borrowers, which nurtures soft budget constraints. [source] Internal Capital Markets and Capital Structure: Bank Versus Internal DebtEUROPEAN FINANCIAL MANAGEMENT, Issue 3 2010Nico Dewaelheyns G32; G21 Abstract We argue that domestic business groups are able to actively optimise the internal/external debt mix across their subsidiaries. Novel to the literature, we use bi-level data (i.e. data from both individual subsidiary financial statements and consolidated group level financial statements) to model the bank and internal debt concentration of non-financial Belgian private business group affiliates. As a benchmark, we construct a size and industry matched sample of non-group affiliated (stand-alone) companies. We find support for a pecking order of internal debt over bank debt at the subsidiary level which leads to a substantially lower bank debt concentration for group affiliates as compared to stand-alone companies. The internal debt concentration of a subsidiary is mainly driven by the characteristics of the group's internal capital market. The larger its available resources, the more intra-group debt is used while bank debt financing at the subsidiary level decreases. However, as the group's overall debt level mounts, groups increasingly locate bank borrowing in subsidiaries with low costs of external financing (i.e. large subsidiaries with important collateral assets) to limit moral hazard and dissipative costs. Overall, our results are consistent with the existence of a complex group wide optimisation process of financing costs. [source] Hedging Affecting Firm Value via Financing and Investment: Evidence from Property Insurance UseFINANCIAL MANAGEMENT, Issue 3 2010Hong Zou I provide evidence about the value effects of alternative risk management by examining corporate purchase of property insurance, a commonly used pure hedge of asset-loss risks. Using an insurance data set from China, I find that there is an inverted U-shape effect of the extent of property insurance use on firm value measured by several versions of Tobin's Q. Therefore, the use of property insurance, to a certain degree, has a positive effect on firm value; however, over insurance appears detrimental to firm value. Given that the inflection points occur at relatively high levels of the observed insurance spending, insurance use appears beneficial to the majority of my sample firms. The estimated average hedging premium is about 1.5%. I demonstrate that an avenue for insurance to create value in China is that it helps firms secure valuable new debt financing and enhance investment. [source] The Impact of Capital Structure on Efficient Sourcing and Strategic BehaviorFINANCIAL REVIEW, Issue 4 2000Sudha Krishnaswami D43/G32/L14 Abstract We model the capital structure choice of a firm that operates under imperfect competition. Extant literature demonstrates that debt commits a firm to an aggressive output stance, which is an advantage to the firm under Cournot competition. However, empirical evidence, indicates that debt is a disadvantage under imperfect competition. We reconcile the theory with the evidence by incorporating firms' relations with their suppliers, in a model of strategic firmrival interactions. Under imperfect competition and incomplete contracting, we show that although debt financing improves a firm's input sourcing efficiency it could also benefit the firm's rivals by lowering their input costs. This effect offsets the benefits due to aggressive product market strategies that result from increased debt. Under certain conditions this subsidy effect is sufficiently strong that debt is suboptimal in equilibrium and leads to an increase in rival's shareholder value. [source] How To Choose a Capital Structure: Navigating the Debt-Equity DecisionJOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2005Anil Shivdasani In corporate offices as well as the classroom, there continues to be significant debate about the costs and benefits of debt financing. There is also considerable variation in corporate credit ratings, even among companies as large and successful as those that make up the S&P 500. Many companies have been reassessing how they manage their balance sheet and their rating agency relationships; and with the market's generally favorable response to recapitalizations and dividend increases, such financing issues are likely to receive even more attention. Underlying the diversity of corporate credit ratings is widespread disagreement about the "right" credit rating,a matter that is complicated by the fact that the cost of debt varies widely among companies with the same rating. Although credit ratings are clearly tied to measures of indebtedness such as leverage and coverage ratios, the most important factor in most industries is a company's size. For many mid-sized companies, an investment-grade rating can be attained only by making a large, equity-financed acquisition,or by making minimal use of debt. In this sense, the corporate choice of credit rating can be as much a strategic issue as a financial decision. Maintaining the right amount of financial fl exibility is a key consideration when determining the right credit rating for a given company (although what management views as value-preserving flexibility may be viewed by the market as value-reducing financial "slack"). A BBB rating will accommodate considerably more leverage (30,60%) in companies with fairly stable cash flows and limited investment requirements than in more cyclical or growth-oriented companies (10,20%). When contemplating taking on more leverage, companies should examine all major operating risks and view their capital structure in the context of an enterprisewide risk management framework. [source] THE CAPITAL STRUCTURE CHOICE: NEW EVIDENCE FOR A DYNAMIC TRADEOFF MODELJOURNAL OF APPLIED CORPORATE FINANCE, Issue 1 2002Armen Hovakimian Most academic insights about corporate capital structure decisions come from models that focus on the trade-off between the tax benefits and financial distress costs of debt financing. But empirical tests of corporate capital structure indicate that actual debt ratios are considerably different from those predicted by the models, casting doubt on whether most companies have leverage targets at all. In particular, there is considerable evidence that corporate leverage ratios reflect in large part the tendency of profitable companies to use their excess cash flow to pay down debt, while unprofitable companies build up higher leverage ratios. Such behavior is consistent with a competing theory of capital structure known as the "pecking order" model, in which management's main objectives are to preserve financing flexibility and avoid issuing equity. The results of the authors' recent study suggest that although past profits are an important predictor of observed debt ratios at any given time, companies nevertheless often make financing and stock repurchase decisions designed to offset the effects of past profitability and move their debt ratios toward their target capital structures. This evidence provides support for a compromise theory called the dynamic tradeoff model, which says that although companies often deviate from their leverage targets, over the longer run they take measures to close the gap between their actual and targeted leverage ratios. [source] Corporate Debt Financing and Earnings QualityJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 5-6 2010Aloke (Al) Ghosh Abstract:, Our study establishes linkages between two extensively researched areas, debt financing and the quality of earnings. Debt can have a ,positive influence'on earnings quality because managers are likely to use their accounting discretion to provide private information about the firms' future prospects to lower financing costs. For high debt, it can also have a ,negative influence' on earnings quality as managers use accruals aggressively to manage earnings to avoid covenant violations. Using accruals quality as a proxy for earnings quality, we document a non-monotonic (curvilinear) relation between debt and earnings quality. The relationship is positive at low levels of debt and negative at high debt levels with an inflection point around 41%. Our results suggest that firms that rely heavily on debt financing might be willing to bear higher costs of borrowing from lower earnings quality because the benefits from avoiding potential debt covenant violations exceed the higher borrowing costs. [source] Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan MarketJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 9-10 2009Jong Chool Park Abstract:, In this paper, we investigate the effect of financial restatements on the debt market. Specifically, we focus on the secondary loan market, which has become one of the largest capital markets in the US, and ask the following: (1) whether financial restatements increase restating firm's cost of debt financing and (2) whether the information about restatements arrives at the secondary loan market earlier than at the stock market? Using 176 restatement data, we find significant negative abnormal loan returns and increased bid-ask spreads around restatement announcements. Furthermore, this negative loan market reaction is more pronounced when the restatement is initiated by either the SEC or auditors, and when the primary reason for restatement is related to revenue recognition issues. Additionally, we find restatement information arrives at the secondary loan market earlier than at the equity market, and that such private information quickly flows into the equity market. We also show that stock prices begin to decline approximately 30 days prior to the restatement announcements for firms with traded loans. However, we do not find such informational leakage for firms without traded loans. Collectively, the results of this paper suggest: (1) increased cost of debt financing after restatements and (2) superior informational efficiency of the secondary loan market to the stock market. [source] Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance DealsJOURNAL OF MONEY, CREDIT AND BANKING, Issue 7 2010FRANCESCO CORIELLI project finance; contractual arrangements; long-term contracts; loan pricing; capital structure We study capital structure negotiation and cost of debt financing between sponsors and lenders using a sample of more than 1,000 project finance loans worth around US$195 billion closed between 1998 and 2003. We find that lenders: (i) rely on the network of nonfinancial contracts as a mechanism to control agency costs and project risks, (ii) are reluctant to price credit more cheaply if sponsors are involved as project counterparties in the relevant contracts, and finally (iii) do not appreciate sponsor involvement as a contractual counterparty of the special purpose vehicle when determining the level of leverage. [source] Effects of Concentrated Ownership and Owner Management on Small Business Debt Financing,JOURNAL OF SMALL BUSINESS MANAGEMENT, Issue 4 2007Zhenyu Wu Using unique data and a new powerful Monte Carlo-based statistical tool, we examine the effects of concentrated ownership and owner,management (CO-OM) on the creditor,shareholder agency conflicts in small firms. A significant CO-OM effect from the small business owner's view, but insignificant from the commercial lenders' perspective, is found. Special features of informational asymmetry problems in small firms with CO-OM are also highlighted. Theoretical and empirical contributions are made to the small business management and corporate governance literature. Findings obtained from this research have important implications for small business practitioners as well as researchers, and this study can serve as a reference for policymakers and institutional lenders to assist small firms in successfully raising money through debt financing. In addition, a new powerful methodology is introduced to deal with various potential statistical biases and can be further applied to this line of research. [source] Capital Structure as a Strategic Variable: Evidence from Collective BargainingTHE JOURNAL OF FINANCE, Issue 3 2010DAVID A. MATSA ABSTRACT I analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier,organized labor. Because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a firm with external finance constraints has an incentive to use the cash flow demands of debt service to improve its bargaining position with workers. Using both firm-level collective bargaining coverage and state changes in labor laws to identify changes in union bargaining power, I show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions. [source] MERGERS UNDER UNCERTAINTY: THE EFFECTS OF DEBT FINANCING,THE MANCHESTER SCHOOL, Issue 5 2007M. PILAR SOCORRO In this paper, we consider a Cournot oligopoly with demand uncertainty, fixed costs and constant marginal costs. The demand uncertainty makes some mergers that would be unprofitable in a certain environment profitable in this model. However, socially advantageous mergers may be still unprofitable for the colluding firms, so public intervention may be needed. One possibility consists in subsidizing such mergers. However, the combination of limited liability debt financing and an appropriate antitrust policy leads to higher social welfare than subsidies. The reason is that, given the limited liability effect, merging parties compete more aggressively, so the reduction in market quantity is mitigated. [source] | ||||||||||||||||||||||