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Book part
Publication date: 27 November 2017

Steven A. Dennis, Yilei Zhang and Song Wang

We examine the maturity structure in private placements of debt and relate it to contracting, signaling, tax, and liquidity risk considerations for firms. We find that…

Abstract

We examine the maturity structure in private placements of debt and relate it to contracting, signaling, tax, and liquidity risk considerations for firms. We find that firms with higher tax rates issue private placements of debt with longer maturities, consistent with the tax hypothesis. However, our results do not support the contracting, signaling, and liquidity risk hypotheses. In addition, the results are confined to the smaller firms in the sample, firms without a public debt rating, and debt issues not pursuant to Rule 144A. The evidence is consistent with smaller firms issuing private placements of debt to avoid monopoly rent extraction from banks.

Details

Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

Keywords

Article
Publication date: 26 January 2022

Muhammad Nouman, Ijaz Ahmad, Muhammad Fahad Siddiqi, Farman Ullah Khan, Mohammad Fayaz and Idrees Ali Shah

The financial policies of the modern world corporations and their investment decisions are generally considered as interrelated because the agency problems, associated…

Abstract

Purpose

The financial policies of the modern world corporations and their investment decisions are generally considered as interrelated because the agency problems, associated with the debt level and its maturity structure, give rise to incentives for overinvestment or underinvestment. The present study empirically investigates the linkage between debt maturity structure and firm investment in a financially constrained environment, using Pakistan as a case study, to determine how the institutional environment in which firms operate affect these decisions and their linkage.

Design/methodology/approach

The empirical analysis is carried in a panel data setting using panel regression models as the baseline methods. Moreover, generalized methods of moments (GMM) estimators are used, coupled with the instrumental variables approach, for robustness and improving the efficiency and consistency of estimates.

Findings

Results suggest that firms rely more on short financing in Pakistan. Thus, given the capital structure which is characterized by higher proportion of short-term financing, the higher level of leverage is less likely to cause underinvestment problem. However, the underinvestment problem do persists in the firms that have higher portion of long-term debt. These findings imply that the debt-overhang problem may persist even in the financially constrained environments where attractive investment opportunities are limited, and long-term financing is difficult to acquire.

Originality/value

This study contributes to the literature by revealing how corporate investment and financing decisions and their linkage is influenced by the institutional environment of the less developed countries which is characterized by underdeveloped financial markets, inefficient legal system and weak investor protection system.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 27 September 2021

Omer Unsal

This paper aims to investigate how firms’ relationships with employees define their debt maturity. The authors empirically test the role of employee litigations in…

Abstract

Purpose

This paper aims to investigate how firms’ relationships with employees define their debt maturity. The authors empirically test the role of employee litigations in influencing firms’ choice of short-term versus long-term debt. The authors study employee relations by analyzing the importance of the workplace environment on capital structure.

Design/methodology/approach

The author’s test hypotheses using a sample of US publicly traded firms between 2000 and 2017, including 3,056 unique firms with 4,256 unique chief executive officer, adopting the fixed effect panel model.

Findings

The authors document that employee litigations have a significant negative effect on the use of short-term debt and a significant positive affect on long-term debt. Employee litigations, along with legal fees, outcomes and charging parties, matter the most in explaining debt maturity. In addition, frequently sued firms abandon the short-term debt market and use less shareholders’ equity to finance their operations while relying more on the longer debt market.

Originality/value

To the best of the authors’ knowledge, this is the first study to examine the role of employee mistreatment in debt maturity choice. The study extends the lawsuit and finance literature by examining unique, hand-collected data sets of employee lawsuits, allegations, violations, settlements, charging parties, case outcomes and case durations.

Details

Corporate Governance: The International Journal of Business in Society, vol. 22 no. 2
Type: Research Article
ISSN: 1472-0701

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Article
Publication date: 1 May 2006

Michel Gendron, Van Son Lai and Issouf Soumaré

The purpose of this paper is to analyse the effects of the maturities of credit‐enhanced debt contracts on the value of an insurer's loan‐guarantee portfolios.

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Abstract

Purpose

The purpose of this paper is to analyse the effects of the maturities of credit‐enhanced debt contracts on the value of an insurer's loan‐guarantee portfolios.

Design/methodology/approach

The paper proposes a contingent‐claims model and uses as measure of credit insurance risk, the market value of the private guarantee, which accounts for projects' and guarantor's specific risks, correlations as well as financial leverage.

Findings

The results indicate that in the case of insuring the debts of two parallel projects with different specific risks, one high‐risk and the other low‐risk, the tradeoff between maturities of the guarantees increases with the projects' expected losses, hence the maturity choice decision is crucial for portfolios subject to high expected losses. For a two sequential projects loan‐guarantee portfolio, the paper finds that, regardless of the order of execution of the projects, it is the maturity of the debt supporting the high‐risk project that drives the risk exposure of the portfolio.

Practical implications

Since the management of portfolios of guarantees is of significant importance to many organizations both domestically and internationally, this paper proposes a simple and tractable model to gauge the impact of maturity choices for loan‐guarantee portfolios.

Originality/value

This is a first attempt at modeling multiple maturities in the context of portfolios of vulnerable loan guarantees.

Details

The Journal of Risk Finance, vol. 7 no. 3
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 16 April 2020

Tesfaye Taddese Lemma, Mehrzad Azmi Shabestari, Martin Freedman, Ayalew Lulseged and Mthokozisi Mlilo

This study aims to investigate the association between corporate carbon risk and debt maturity and the moderating role of voluntary disclosure, within the context of South…

Abstract

Purpose

This study aims to investigate the association between corporate carbon risk and debt maturity and the moderating role of voluntary disclosure, within the context of South Africa, an emerging player in the climate policy debate.

Design/methodology/approach

Based on the insights drawn from agency as well as information asymmetry theories, the authors develop models that link debt maturity with corporate carbon risk and voluntary disclosure and examine data obtained from companies listed on the Johannesburg Securities Exchange (JSE), for the period 2011-2015.

Findings

The findings document that, other things being equal, debt maturity is significantly higher, both statistically and economically, for companies with lower carbon intensity (risk). In addition, high-quality carbon disclosure accentuates the positive association between debt maturity and the inverse of carbon intensity. The results are robust to alternative measures of corporate carbon risk and issues of endogeneity. The findings are consistent with the view that lenders in South Africa use debt maturity as a non-price mechanism to address borrower risk and grant lower carbon risk companies that voluntarily provide higher quality carbon disclosures an even higher access to longer maturity debts; JSE-listed companies could use voluntary carbon disclosure to ease their access to debt with longer maturity.

Practical implications

The findings of this study have important implications to borrowers, pressure groups, policymakers and other stakeholders.

Originality/value

To the best of the authors’ knowledge, this study is the first to document evidence suggesting that lenders in South Africa use debt maturity as a non-price mechanism to address borrower risk.

Details

International Journal of Accounting & Information Management, vol. 28 no. 4
Type: Research Article
ISSN: 1834-7649

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Article
Publication date: 13 July 2015

Hong Kim Duong, Anh Duc Ngo and Carl B. McGowan

– The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions.

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Abstract

Purpose

The purpose of this paper is to examine the role of industry peers in shaping firm debt maturity decisions.

Design/methodology/approach

The authors use idiosyncratic equity shocks as instruments to disentangle industry fixed and peer effects. The authors also employ a three-stage least squares regression (3SLS) model to capture the correlation among thee (short, medium, and long) debt maturity decisions.

Findings

The authors find that a one standard deviation change in peer short (medium, long) maturity debt leads to a 50 percent (37 percent, 23 percent) change in firm corresponding maturity debt and that these mimetic behaviors are statistically significant within, but not between, firm size groups. The findings also reveal that firms that mimic the short and medium (long) debt maturity structure of their peers tend to increase (decrease) firm performance as measured by profitability, return-on-assets, and stock returns.

Research limitations/implications

First, given the research design, the authors are constraint from pinpointing the exact date of the mimicking behaviors. This limitation prevents the authors from establishing the causality of the mimicking behavior and firm performance. Future research can extend the findings by solving this problem. Second, it should be interesting to address the question of whether mimicking behavior is good or bad for firm performance. The authors only compare the performance of Close Followers and Loose Followers; however, it would be more precise to compare the performance of mimicking firms with the performance of non-mimicking firms.

Originality/value

First, the findings extend the debt maturity structure literature by providing empirical evidence that an important determinant of firm debt maturity is industry peer debt maturity. Since debt maturity directly influences firm risk and performance, it is important for debt and equity holders to know how firms choose their debt maturity so that they can estimate their investment risk precisely. Second, the paper provides new empirical evidence supporting the information acquisition and principal-agent theories in demonstrating that firm performance increases when managers herd over short and medium debt maturity decisions and decreases when managers herd over long debt maturity decisions.

Details

Managerial Finance, vol. 41 no. 7
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 11 January 2018

Zulfiqar Ali Memon, Yan Chen, Muhammad Zubair Tauni and Hashmat Ali

The purpose of this paper is to investigate the influence of cash flow volatility on firm’s leverage levels. It also analyzes how cash flow volatility influences the debt

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Abstract

Purpose

The purpose of this paper is to investigate the influence of cash flow volatility on firm’s leverage levels. It also analyzes how cash flow volatility influences the debt maturity structure for the Chinese listed firms.

Design/methodology/approach

The authors construct the measure for cash flow variability as five-year rolling standard deviation of the cash flow from operations. The authors use generalized linear model approach to determine the effect of volatility on leverage. In addition, the authors design a categorical debt maturity variable and assign categories depending upon firm’s usage of debt at various maturity levels. The authors apply Ordered Probit regression to analyze how volatility affects firm’s debt maturity structure. The authors lag volatility and other independent variables in the estimation models so as to eliminate any possible endogeneity problems. Finally, the authors execute various techniques for verifying the robustness of the main findings.

Findings

The authors provide evidence that higher volatility of cash flows results in lower leverage levels, while the sub-sampling analysis reveals that there is no such inverse association in the case of Chinese state-owned enterprises. The authors also provide novel findings that irrespective of the ownership structure, firms facing high volatility choose debt of relatively shorter maturities and vice versa. Overall, a rise of one standard deviation in volatility causes 8.89 percent reduction in long-term market leverage ratio and 26.62 percent reduction in the likelihood of issuing debentures or long-term notes.

Research limitations/implications

This study advocates that cash flow volatility is an essential factor for determining both the debt levels and firm’s term-to-maturity structure. The findings of this study can be helpful for the financial managers in maintaining optimal leverage and debt maturity structure, for lenders in reducing their risk of non-performing loans and for investors in their decision-making process.

Originality/value

Existing empirical literature regarding the influence of variability of cash flows on leverage and debt maturity structure is inconclusive. Moreover, prior research studies mainly focus only on the developed countries. No previous comprehensive study exists so far for Chinese firms in this regard. This paper endeavors to fulfill this research gap by furnishing novel findings in the context of atypical and distinctive institutional setup of Chinese firms.

Details

China Finance Review International, vol. 8 no. 1
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 27 December 2021

Wellington Charles Lacerda Nobrega, Cássio da Nóbrega Besarria and Edilean Kleber da Silva Bejarano Aragón

This paper aims to investigate the existing relations between the management of public bonds on the dynamics of debt, term structure of interest rates and economic cycle…

Abstract

Purpose

This paper aims to investigate the existing relations between the management of public bonds on the dynamics of debt, term structure of interest rates and economic cycle, through a dynamic stochastic general equilibrium model (DSGE), which was estimated through Bayesian inference techniques using data from Brazil.

Design/methodology/approach

The model developed was used to investigate the effects of the public debt average maturity management when the economy faces a monetary policy shock. For this, three management scenarios are evaluated, including Brazilian securities average term.

Findings

Contrary to what might be inferred from DSGE models that limited the analysis of the debt term by imposing only one-period bonds, a contractionary monetary policy shock does not necessarily cause public debt to increase significantly. Debt term structure plays a crucial role in this result since the government does not need to roll the debt over at higher costs when the debt term profile is longer, reducing the debt service costs and then the impact on the overall debt.

Originality/value

Despite the relevance of this theme and its implications for the dynamics of the economy, there is still a gap to be filled in the literature when using DSGE models, since most part of the work that used this methodology limited the analysis of the debt term by imposing that government issues only one-period bonds. This paper differs from the others insofar as it promotes an investigation focused on the role played by debt maturity management on the performance of the contractionary monetary policy. This approach can generate a better understanding of debt management policy and its interaction with fiscal and monetary policies.

Details

Journal of Economic Studies, vol. 49 no. 6
Type: Research Article
ISSN: 0144-3585

Keywords

Article
Publication date: 12 April 2019

Celia Álvarez-Botas and Víctor M. González-Méndez

The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm…

Abstract

Purpose

The purpose of this paper is to analyse the effect of economic development on the influence of country-level determinants on corporate debt maturity, bearing in mind firm size and the period of financial crisis.

Design/methodology/approach

The authors employ panel data estimation with fixed effects to examine the role of economic development in influencing the relationship between country-level determinants on corporate debt maturity. The paper uses a sample of 30,727 listed firms, belonging to 39 countries, over the period 2005–2012.

Findings

Corporate debt maturity increases with the efficiency of the legal system and bank concentration and decreases with the weight of banks in the economy. However, the importance of these country determinants is greater in developing than in developed countries. The authors also show that firm size in developed and developing countries influences country determinants of corporate debt maturity. Finally, the results reveal that the financial crisis has affected the debt maturity of firms differently in developed and developing countries, with the effect of bank concentration lengthening debt maturity, this effect being more pronounced in developing countries.

Practical implications

The findings provide useful insights to guide policy decisions providing access to long-term financing, as corporate debt maturity depends on economic development, institutional environment, banking structure and firm size.

Originality/value

This study incorporates economic development in explaining the relationship between country-level determinants and corporate debt maturity.

Details

International Journal of Managerial Finance, vol. 15 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 22 December 2020

Jagan Kumar Sur and Yogesh Chauhan

We examine how business group affiliation affects corporate debt maturity.

Abstract

Purpose

We examine how business group affiliation affects corporate debt maturity.

Design/methodology/approach

This study employs the financial data of all listed Indian companies obtained from the CMIE database for 2011–2018. The ordinary least square, firm-fixed effect and Fama–Macbeth regression methods are used for empirical analysis. We use propensity score matching and difference-in-difference method to address endogeneity issues. Further, two-stage least square (2SLS) regression is performed to mitigate the endogeneity that stems from simultaneity between debt maturity and leverage.

Findings

Using Indian firms, we report that group affiliation is positively associated with corporate debt maturity; group firms use more long-term debt compared to similar standalone firms. We also observe that the positive effect of group affiliation on debt maturity is more pronounced in business group firms associated with a group having more resources and having unrelated diversification. However, information asymmetry and moral hazard problems weaken the impact of group affiliation on debt maturity structure of a firm. Overall, our results are consistent with co-insurance benefits that are an argument for the presence of business groups in emerging markets.

Originality/value

This study contributes to the existing literature by testing the role of group affiliation on corporate debt maturity decisions in the Indian market context where market imperfections persuade firms to borrow from banks. This is also the first study on determinants of corporate debt maturity that distinguishes between public and private debt.

Details

International Journal of Managerial Finance, vol. 17 no. 5
Type: Research Article
ISSN: 1743-9132

Keywords

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