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Expert briefing
Publication date: 31 October 2022

The debt problem is more serious, and the tools available to deal with it less developed, than often assumed. To develop plans to deal with debt problems, the…

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DOI: 10.1108/OXAN-DB273691

ISSN: 2633-304X

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Geographic
Topical
Article
Publication date: 16 January 2023

Mine Aksoy and Mustafa Kemal Yilmaz

This study aims to investigate the effects of board characteristics on the cost of debt for non-financial companies in the Turkish capital markets.

Abstract

Purpose

This study aims to investigate the effects of board characteristics on the cost of debt for non-financial companies in the Turkish capital markets.

Design/methodology/approach

Using a sample of 211 non-financial companies listed on Borsa Istanbul, this study examines how chairperson gender and board characteristics affect the cost of debt by using panel data analysis over the period of 2016–2020. A system generalized method of moments model is also applied to test the endogeneity issue.

Findings

The findings show that the presence of female chairperson and female directors on board reduces the cost of debt and the perceptions of default risk by fund providers, while board independence and board size do not have a significant impact on the cost of debt. The results provide insightful information for companies and policymakers. Companies can alter board composition through gender diversity, while policymakers can introduce new policies in encouraging the presence of female directors on boards.

Originality/value

This study primarily enriches the literature on the effect of board diversity on debt financing cost in a leading emerging market, enabling companies in emerging markets to better mitigate agency costs and finance their investment through effective board composition. Second, it provides evidence that financial institutions consider companies with chairwomen and women directors on the boards less risky and charge them less for debt financing than they do for companies with man chairperson. Finally, the results support policymakers to take actions to increase female presence on board.

Details

Gender in Management: An International Journal , vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1754-2413

Keywords

Open Access
Article
Publication date: 2 January 2023

Adamu Braimah Abille and Esin Kiliç

The impact of debt on economic growth has attracted immense economic research necessitated by ballooning public debt stock among countries and most of the literature…

Abstract

Purpose

The impact of debt on economic growth has attracted immense economic research necessitated by ballooning public debt stock among countries and most of the literature presume a symmetric relationship between debt and economic growth. However, this study contemplates an asymmetric relationship and thus relies on annual series from 1970 to 2019 to examine the asymmetric effects of public debt on economic growth in Ghana.

Design/methodology/approach

The nonlinear autoregressive distributed lag (NARDL) bounds approach was employed. Gross domestic product (GDP) growth is the dependent variable while public debt and other control variables each decomposed into their positive and negative shocks constitute the independent variables.

Findings

The results reveal that a positive shock to public debt insignificantly impacts the growth of the economy in the short and long runs. Also, a negative shock to public debt exerts significant short-run negative and insignificant long-run positive effects on the growth of the economy. The divergence in the short- and long-run effects on growth of a negative shock to public debt and the general insignificant effects of a positive shock to the same is a glitch that is attributed to overcapitalized loans and poor utilization of credit facilities.

Practical implications

The study recommends “inter alia” that the government of Ghana strengthens the short to medium-term debt management strategies achievable through the enforcement of the Public Financial Management Act (PFMA) Act-921 and the Public Procurement Act (PPA) Act-914 to deal with any adverse effects of debt on the growth of the economy.

Originality/value

The novelty of the current study lies not only in the fact that it captures recent public debt dynamics at a time Ghana faces extreme fiscal constraints and escalating cost of debt servicing but it also does so in an asymmetric environment which is unprecedented an assumption in the analysis of Ghana's public debt–economic growth nexus.

Details

Review of Economics and Political Science, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2356-9980

Keywords

Open Access
Article
Publication date: 6 January 2023

Johnson Worlanyo Ahiadorme

The Covid-19 pandemic has rekindled interest in sovereign debt crises amidst calls for debt relief for developing and emerging countries. But has debt relief lessened the…

Abstract

Purpose

The Covid-19 pandemic has rekindled interest in sovereign debt crises amidst calls for debt relief for developing and emerging countries. But has debt relief lessened the debt burdens of emerging and developing economies? The purpose of this paper is to empirically address this question. In particular, the focus is on the implications of debt relief and institutional qualities for sovereign debt in emerging and developing economies.

Design/methodology/approach

The model extends the framework on the probability of default by incorporating the receipt of debt relief by a debtor country. Doing so allows to better explain movements of sovereign defaults relating to debt relief. The model is estimated via the regular probit regression.

Findings

The analysis shows that the debt relief provided, thus, far, failed to ease the debt overhang problems of developing and emerging countries and reduced investment. The current debt relief schemes may underscore the prospects of self-enforcing and self-fulfilling sovereign debt crises rather than eliminating the dilemma completely. Regarding the forms of debt relief, the analysis shows that debt forgiveness offers favourable prospects in terms of debt sustainability and economic outcomes than debt rescheduling. Perhaps, the sovereign debt crises, particularly in low-income countries, hinge on insolvency problems rather than transitory illiquidity issues.

Practical implications

Any debt relief mechanism should consider seriously the potential incentive effect that reinforces expectations of future debt-relief initiatives. Importantly, solving the sovereign debt problem requires a programme for sustained investment and economic growth, while not discounting the critical role of prudent debt management policies and institutions.

Originality/value

This study contributes a different angle to the debate on sovereign debt distress. Aside from the structural and economic factors, this study investigates the role of debt management policy in the debtor nation and the implications of debt relief benefits for sovereign risk. The framework also focuses on whether the different forms of debt relief exert distinctive impacts.

Details

Journal of Financial Economic Policy, vol. 15 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 19 December 2022

Chee Kwong Lau

This study proposes an alternative perspective on why firms issue convertible debt, to supplement the largely theoretical motives identified in the existing literature. It…

Abstract

Purpose

This study proposes an alternative perspective on why firms issue convertible debt, to supplement the largely theoretical motives identified in the existing literature. It hypothesises that the separate presentation of convertible debt into its equity and liability components has economic consequences and advantage that explain why firms issue convertible over non-convertible debt, consistent with the debt covenant hypothesis. The purpose of this paper is to address the proposed perspective and hypothesis.

Design/methodology/approach

Data on convertible debt, gearing (debt assets and debt equity), debt issuance and retirement, etc. were collected for a sample of 1,104 firms listed on Bursa Malaysia. Regression analyses were then used to assess the hypotheses on how gearing affects the use of convertible debt and the impacts of its use on changes in gearing over the financing cycle.

Findings

Firms with higher gearing, and possibly those close to violating debt covenants, are more likely to issue convertible than non-convertible debt. In addition, the use of convertible rather than non-convertible debt both reduces the increase in gearing when debts are issued and leads to a larger decrease in gearing during debt retirements via conversion.

Practical implications

These effects on gearing provide firms with additional financial flexibility and enhance firms' capacity to borrow more from other sources, a lower-debt advantage.

Originality/value

This study demonstrates the informational role of financial reporting in addressing the stewardship emphasis, as part of the decision usefulness objective of financial reporting in the Conceptual Framework for Financial Reporting.

Details

Asian Review of Accounting, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1321-7348

Keywords

Article
Publication date: 4 January 2023

Gaurav Singh Chauhan

This paper aims to highlight firms' profitability as an alternative channel by which changes in leverage could affect stock returns in an imperfect market setting. The…

Abstract

Purpose

This paper aims to highlight firms' profitability as an alternative channel by which changes in leverage could affect stock returns in an imperfect market setting. The author also analytically argues that the benefits of debt, if any, may accrue beyond the usual tax benefit channel.

Design/methodology/approach

The author used multivariate regression models based on firms' characteristics and the models' changes along with a two-stage least-square (2SLS) type procedure to estimate the impact of leverage changes on stock returns. The author controls for the varying arbitrage risk that is measured by forecasted idiosyncratic volatility of stock prices and overcome simultaneous or endogenous determination by using inter-temporal non-synchronous variation in leverage and control variables.

Findings

The author finds that increase in leverage increase (decrease) stock returns for firms with the gross operating profitability higher (lower) than the cost of debt. The author also finds that the variation in arbitrage risk does not substitute for the primary effect of leverage changes on stock returns.

Research limitations/implications

The author's findings provide tacit support to the recent literature attempting to resolve the empirically puzzling pattern of the negative relationship between profitability and leverage. The findings suggest inclusion of profitability as a crucial asset-pricing factor in the contemporary empirical models.

Practical implications

The non-trivial role of profitability in determining the effect of leverage on firms' stock returns that may be useful to managers, credit analysts and policy makers to assess the impact of net profitability on any change in leverage and its ensuing consequences on firms' value.

Originality/value

The paper develops analytical insights into the marginal role of profitability in influencing the relationship between firms' financing decisions and firms' stock returns beyond the conventional mechanisms of tax benefits, bankruptcy costs and information asymmetry.

Details

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

Keywords

Article
Publication date: 1 March 1987

E.A. Evans

Considerable debate centres around the use of debt finance as opposed to new equity and internally generated funds for the financing of new investment projects. The…

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Abstract

Considerable debate centres around the use of debt finance as opposed to new equity and internally generated funds for the financing of new investment projects. The favourable corporate tax treatment of debt interest payments compared to equity returns appears to be a government incentive to debt finance. In addition, the differential tax treatment of financial institutions' income and individual investors' income under the tax code, all leads to the idea, that debt financing may increase the market value of a firm beyond the expected value of its operational cash flows.

Details

Managerial Finance, vol. 13 no. 3/4
Type: Research Article
ISSN: 0307-4358

Article
Publication date: 16 March 2015

Jacques A. Schnabel

This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is…

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Abstract

Purpose

This paper aims to examine the nexus between hedging, which reduces the volatility of corporate assets, and the anomaly of debt overhang, whereby corporate management is motivated to reject positive net present value (NPV) projects. The question of whether hedging ameliorates or aggravates debt overhang is addressed.

Design/methodology/approach

The Black–Scholes isomorphism between common shares and call options is exploited to determine the allocation of a project’s NPV between debt- and stock-holders. The effect of hedging on this NPV-partitioning is then gauged to determine the resulting likelihood of debt overhang.

Findings

If the volatility of corporate assets is below a critical maximum, hedging ameliorates debt overhang consistent with extant theoretical research. However, above that critical value of volatility, hedging aggravates debt overhang.

Originality/value

The novel result of this note, namely, hedging may exacerbate debt overhang, is demonstrated both analytically and intuitively. The latter is explained by allusion to a second agency-theoretic conflict between debt- versus stock-holders, namely, risk shifting. The disparate effects of hedging on debt overhang imply a non-monotonic relationship between metrics for these two variables, which is a phenomenon that extant empirical studies have failed to take into account.

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The Journal of Risk Finance, vol. 16 no. 2
Type: Research Article
ISSN: 1526-5943

Keywords

Expert briefing
Publication date: 16 September 2019

The outlook for provincial debt.

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DOI: 10.1108/OXAN-DB246414

ISSN: 2633-304X

Keywords

Geographic
Topical
Article
Publication date: 1 December 2007

Martin Lally

This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt

Abstract

This paper examines the appropriate term of the risk free rate to be used by a regulator in price control situations, most particularly in the presence of corporate debt. If the regulator seeks to ensure that the present value of the future cash flows to equity holders equals their initial investment then the only choice of term for the risk free rate that can achieve this is that matching the regulatory cycle, but it also requires that the firm match its debt duration to the regulatory cycle. Failure of the firm to do so leads to cash flows to equity holders whose net present value will tend to be negative, and will also inflict interest rate risk upon equity holders. This provides the firm with strong incentives to match its debt duration to the regulatory cycle.

Details

Accounting Research Journal, vol. 20 no. 2
Type: Research Article
ISSN: 1030-9616

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