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Article
Publication date: 20 August 2021

Heesun Chung, Bum-Joon Kim, Eugenia Y. Lee and Hee-Yeon Sunwoo

This study aims to examine whether debt financing creates incentives for private firms to engage in earnings management via classification shifting. Especially, the…

Abstract

Purpose

This study aims to examine whether debt financing creates incentives for private firms to engage in earnings management via classification shifting. Especially, the authors examine whether debt-induced financial reporting incentives differ depending on the type of debt (i.e. public bonds versus private loans) and whether such incentives are influenced by the characteristics of external auditors (i.e. initial audits and auditor size).

Design/methodology/approach

The study uses data on 93,427 Korean private firms from 2001 to 2016. Classification shifting is measured by the positive correlation between non-core expenses and unexpected core earnings estimated with ordinary least squares.

Findings

The empirical analyses reveal that private firms engage in classification shifting as do public firms. Importantly, classification shifting is observed only in private firms that have outstanding debt, but not in private firms without debt. Among debt-financing private firms, classification shifting is more prevalent for firms that issue public debt than for firms that only use private debt. In addition, classification shifting of debt-financing private firms is more successful when they are audited by new auditors that are one of the non-Big 4 firms.

Research limitations/implications

The study provides evidence of classification shifting in private firms, which is novel to the literature. However, the inferences in the study depend on the validity of the model for detecting classification shifting.

Practical implications

This study helps lenders enhance their understanding on the financial reporting behaviors of borrowing firms. The results in this study suggest that lenders should be cautious in using core earnings for their investment decisions.

Originality/value

This study contributes to the literature by providing novel evidence of classification shifting in private firms. In addition, the authors contribute to the literature on debt-induced incentives for financial reporting.

Details

Managerial Auditing Journal, vol. 36 no. 7
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 16 July 2021

Sheunesu Zhou

The aim of this paper is to analyse the relationship between public debt, corporate debt service costs and private capital formation in South Africa.

Abstract

Purpose

The aim of this paper is to analyse the relationship between public debt, corporate debt service costs and private capital formation in South Africa.

Design/methodology/approach

To capture the long-run characteristic of investment, the study adopts the Fully Modified Ordinary Least Squares approach and tests for cointegration using Hansen (1992)'s Parameter Instability test.

Findings

We find that private capital formation increases in domestic debt and decreases in external debt during the pre-crisis period. However, during the period post the Global Financial Crisis, we find evidence of domestic public debt crowding out private capital formation, whereas external debt crowds-in capital formation. Debt service costs are found to reduce investment due to the effect of the debt overhang throughout the period under analysis.

Research limitations/implications

The paper has important implications for macroeconomic policy. In particular, there is need for deleveraging and allocation of a higher proportion of debt to public infrastructure expenditure which has complementary effects on private investment.

Practical implications

Debt overhang signal that South African firms could be over-leveraged, which hinders future growth prospects. Firms that face high levels of debt should consider debt restructuring.

Originality/value

Empirical studies undertaken to explore this relationship have yielded contradicting results suggesting that the relationship between public debt and private investment is heterogeneous depending on a given economy or prevailing macroeconomic environment. In particular, existing research does not provide evidence on whether recent increases in public debt in South Africa have led to crowding-in or crowding-out of private investment. This paper therefore contributes to empirical literature on the impact of public debt on private investment within a small open economy.

Details

African Journal of Economic and Management Studies, vol. 12 no. 3
Type: Research Article
ISSN: 2040-0705

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Book part
Publication date: 19 February 2020

Richard Sturn

This chapter discusses the evolution of German views on public debt 1850–1920, referring to three strands of secondary literature: (1) German retrospectives on public

Abstract

This chapter discusses the evolution of German views on public debt 1850–1920, referring to three strands of secondary literature: (1) German retrospectives on public finance, (2) the historical literature with a public choice perspective, and (3) contributions to public/constitutional law, mainly referring to Lorenz von Stein. The skeptic view of public debt endorsed by authors of the second half of the period is shown to be related to politico-economic issues of state agency combined with new state functions, rather than to the rejection of Dietzel’s Proto-Keynesian macroeconomic reasoning.

Details

Research in the History of Economic Thought and Methodology: Including a Symposium on Public Finance in the History of Economic Thought
Type: Book
ISBN: 978-1-83867-699-5

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Article
Publication date: 18 May 2021

Asset Mukhtarkhan

The purpose of this paper is to study debt sustainability of countries with a resource-based economy on the example of the Republic of Kazakhstan and the Russian Federation.

Abstract

Purpose

The purpose of this paper is to study debt sustainability of countries with a resource-based economy on the example of the Republic of Kazakhstan and the Russian Federation.

Design/methodology/approach

Macroeconomic indicators and data on external and internal public debt of the Republic of Kazakhstan and the Russian Federation for the period from 2007 to 2019 were analyzed using quantitative, qualitative, comparative, descriptive and graphical methods. Based on the collected data, the indicators were calculated, analyzed and compared, taking into account the threshold values, using The Debt Sustainability Framework for Low-Income Countries of the International Monetary Fund and the World Bank.

Findings

The results of the study showed that the indicators of the public debt of both the Republic of Kazakhstan and the Russian Federation, during the period covered by the study, were in the zone of reduced risk and were stable. In addition, the study revealed a slight shift in the structure of the public debt of the Republic of Kazakhstan toward a decrease in the share of domestic borrowing (from 67% to 55%), whereas in the structure of the Russian public debt, the share of domestic borrowing increased significantly (from 52% to 74%).

Originality/value

The results of this study can be applied by scientists to analyze the sustainability of public debt in various countries and regions, as well as by officials to determine the fiscal and budgetary policies of the Republic of Kazakhstan and the Russian Federation, as well as other states.

Details

International Journal of Organizational Analysis, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1934-8835

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Book part
Publication date: 4 December 2018

Indranarain Ramlall

Abstract

Details

The Corporate, Real Estate, Household, Government and Non-Bank Financial Sectors Under Financial Stability
Type: Book
ISBN: 978-1-78756-837-2

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Book part
Publication date: 19 February 2020

Javier San Julián Arrupe

Since the early modern age, the debt of the State was a constant source for concern to the Spanish governments. Episodes of defaults caused by enormous expenditure to keep…

Abstract

Since the early modern age, the debt of the State was a constant source for concern to the Spanish governments. Episodes of defaults caused by enormous expenditure to keep the Empire slowly faded out until a certain reorganization of public finance was attained in the central decades of the nineteenth century. The core idea that finance ministers and economists, in general, had at that time was to balance the public budget controlling expenses, in order to handle the problem of public debt. However, alternative views on government finance existed. Focusing on a crucial period for the consolidation of Spanish liberal regime and its public finance, this chapter shows that, among a predominant concern for reducing public expenditure as the best way to stabilize the economy and promote economic growth, the character of Luis María Pastor emerges to support government expansionary policies financed with credit. Far from fearing deficit, Pastor, one of the leaders of the Spanish liberal school of economic thought, believed that investment in infrastructures financed through debt was the key to economic growth. Through a multiplicative effect, a program of public investment would enhance economic growth, eventually solving the long-term insufficiency of Spanish finance. This gives evidence that ideas on public finance of classical liberal economists were far from uniform, contributing to a more precise view on the body of doctrines of this school.

Details

Research in the History of Economic Thought and Methodology: Including a Symposium on Public Finance in the History of Economic Thought
Type: Book
ISBN: 978-1-83867-699-5

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Article
Publication date: 4 December 2020

Alexey Zhukovskiy, Heidi Falkenbach and Ranoua Bouchouicha

This paper aims to examine the relationship between the use of public debt and investment activity of European listed real estate companies.

Abstract

Purpose

This paper aims to examine the relationship between the use of public debt and investment activity of European listed real estate companies.

Design/methodology/approach

Using a hand-collected sample of debt structures of 102 European public real estate companies, and using European Central Bank lending standards survey as a proxy for bank credit availability, the authors test a conditional hypothesis on the relationship between investment rates and the use of public debt during period of constrained bank lending environment in Europe.

Findings

The results show that ex ante diversification of debt allows retaining higher investment rates when the main source of debt, bank lending, is shrinking. The effect is statistically and economically significant and increases during times of tight bank lending constraints. The authors find no support to debt capacity explanation of the effect. They neither find support of the higher investment rates to be indicative of overinvestment problem. The results are robust to alternative model specifications and estimators.

Research limitations/implications

The empirical analysis is limited to Europe.

Practical implications

Investments and the growth of real estate companies depend on their ability to seize value-increasing opportunities that arise in the competitive markets. This paper evaluates the role of a diversified debt structure in this context. The results suggest that debt structure can have material importance for the investment activity of European listed real estate companies and issuance of public debt can help companies to counterbalance the negative effects of restricted bank loan supply on the investment levels.

Originality/value

The paper extends the literature on debt structures of listed real estate firms by considering the effect of debt diversification on investments.

Details

Journal of European Real Estate Research , vol. 14 no. 1
Type: Research Article
ISSN: 1753-9269

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Article
Publication date: 9 November 2020

Fisayo Fagbemi and Opeoluwa Adeniyi Adeosun

The main goal of the study is to explore the long run relationship between public debt and domestic investment in West Africa. Essentially, a study of this nature is to…

Abstract

Purpose

The main goal of the study is to explore the long run relationship between public debt and domestic investment in West Africa. Essentially, a study of this nature is to proffer major inroads into addressing low investment levels plaguing the region and securing critical fiscal policy measures.

Design/methodology/approach

The study examines the long-run relationship between public debt and domestic investment in 13 West African countries between 1986 and 2018 with the use of Panel Dynamic Least Squares (DOLS) and Panel Fully Modified Least Squares (FMOLS), and causality test based on Toda and Yamamoto.

Findings

Public debt (% of GDP) and external debt stocks have an insignificant effect on domestic investment in the long run, suggesting the negligible effect of public debt on the level of investments in the region. Further evidence shows that domestic investment Granger causes public debt indicators, implying that there is unidirectional causality. This suggests that any investment-generation policy could engender a rise in public borrowing, although such public loans might not be effective when there is pervasive mismanagement of public funds, as public debts need to be well managed for ensuring improved investment.

Research limitations/implications

The study suggests that maintaining a strong and effective debt-investment nexus requires fiscal consolidation efforts across countries, as such could lead to enhanced institutional capacity and sustainable investment-generation policy.

Originality/value

Since panel regression techniques used by the previous studies (Fixed and Random effects) could be susceptible to possible statistical errors due to endogeneity issue and might not be well suited for explaining long-run effect or capturing the part of investment sustainability, their conclusions could be misleading and remain untenable in West Africa' s context. Hence, the study adopts techniques (DOLS and FMOLS) which could account for endogeneity issue and provide better elucidations for long-term effects.

Details

Journal of Economic and Administrative Sciences, vol. 37 no. 4
Type: Research Article
ISSN: 1026-4116

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Article
Publication date: 13 August 2021

Bongumusa Prince Makhoba, Irrshad Kaseeram and Lorraine Greyling

The primary purpose of the study is to analyse the asymmetric effects of public debt on economic growth, using secondary data over the period 1980–2018 in South Africa.

Abstract

Purpose

The primary purpose of the study is to analyse the asymmetric effects of public debt on economic growth, using secondary data over the period 1980–2018 in South Africa.

Design/methodology/approach

This study estimated a Smooth Transition Regression (STAR) and Nonlinear Autoregressive Distributed Lag (NARDL) approach, using time series data to analyse the asymmetric effect of public debt on economic growth in South Africa.

Findings

The findings revealed a significant nonlinear relationship between public debt and economic growth in South Africa. The results showed an inverted U-Shape relationship, implying a significant positive influence of public debt on economic growth during the low-debt regime. While during a high-debt regime, public debt exerted a significant negative effect on economic growth. The study proposes that policymakers ought to consider targeting a sustainable debt threshold that would enhance efficient use of public finances consistent with long-term economic prosperity.

Originality/value

This paper asymmetries and threshold effects between public debt and economic growth in South Africa, through the application of dynamic nonlinear models namely, Smooth Transition Regression (STAR) and Nonlinear Autoregressive Distributed Lag (NARDL) approach. Studies on the relationship under examination have predominantly been confined in advanced economies. This study provides rigorous empirical evidence from the South African perspective.

Details

African Journal of Economic and Management Studies, vol. 12 no. 3
Type: Research Article
ISSN: 2040-0705

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Book part
Publication date: 19 February 2020

Nesrine Bentemessek Kahia

By the beginning of the nineteenth century, British public debt, accumulated over the eighteenth century and during the Revolutionary and Napoleonic Wars (1793–1815), had…

Abstract

By the beginning of the nineteenth century, British public debt, accumulated over the eighteenth century and during the Revolutionary and Napoleonic Wars (1793–1815), had attained extremely high levels, at times even reaching 200% of the gross national product (GNP). This increase in debt paradoxically coexisted with the early progression of the industrial revolution.

In this chapter, we explain this concomitance by the effective policies of sovereign debt management put in place by the State and the Bank of England (BoE). First, the State put in place measures to lower its risk of default by funding its debt with tax revenue that would allow it to honour due payments. Second, following the suspension in 1797 of cash payments for pounds sterling, the BoE, in addition to its role in financing the State, followed an active policy of sovereign debt management, promoting both bank liquidity and market liquidity.

Details

Research in the History of Economic Thought and Methodology: Including a Symposium on Public Finance in the History of Economic Thought
Type: Book
ISBN: 978-1-83867-699-5

Keywords

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