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How does uncertainty affect the costs of raising finance in the bond market and via bank loans? Empirically, this paper finds that heightened uncertainty is accompanied by an increase in corporate bond spreads, whereas spreads on bank loans remain unchanged. This finding can be explained with a model that includes costly state verification and in which banks maintain long‐term relationships with borrowers and acquire information beyond what is publicly available. After an unexpected increase in uncertainty, the probability of borrower default increases. Banks leave the loan spread unchanged to maintain the relationship. In contrast, bond spreads increase because investors demand compensation for the increased default risk. [ABSTRACT FROM AUTHOR]

From the angle of research and development (R&D) input, this paper analyzes how bond financing affects corporate total factor productivity (TFP). Based on the 2007–2019 data on listed enterprises, the influence and action mechanism of bond financing on corporate TFP were empirically examined. The results show that bond financing significantly boosts corporate TFP. The mechanism analysis reveals that bond financing promotes TFP by stimulating corporate R&D input. The research sheds new light on the relationship between finance and TFP from the perspective of bond financing and provides a reference for policymakers to boost corporate TFP by promoting bond financing. [ABSTRACT FROM AUTHOR]

We examine the effect of the bond capital supply uncertainty of institutional investors (e.g., mutual bond funds and insurance companies) on the leverage of the firm using a novel data set. Our main finding is that the supply uncertainty of the firm's bond investor base - measured as (i) the average portfolio turnover, or (ii) the average flow volatility of investors holding the firm's bonds, or (iii) the prevalence of mutual funds among the firm's bondholders as opposed to insurance companies - has a negative and significant effect on the leverage of the firm. The supply uncertainty of the firm's bond investor base also has a negative and significant effect on the firm's probability of issuing bonds, and a positive and significant effect on the firm's probability of issuing equity and borrowing from banks. We take a multi-pronged approach to address potential endogeneity issues, including use of geography-based instruments and firm fixed effects, subsample analyses, and a placebo test. Our results highlight the fragility of access to the bond market for companies that depend on mutual funds with high turnover/ flow volatility as primary bond investors. © 2013 Elsevier B.V.

The Polish corporate bond market does not have a history as long as the American one, however, it is characterized by stable annual growth. The growth of the market is related to the growth of its liquidity and is determined by a number of entities, both on the demand and the supply side. The aim of the study was to present the structure of the Catalyst market and bond trading in Poland. The study also discusses the market's development and identifies the factors that determine this development. Based on reports concerning trading on the Catalyst market, a huge growth was noticed in the 10 years since the market's establishment. Forecasts indicate that the growth will continue. The outbreak of the SARS-CoV-2 pandemic will cause the market development to be slower than the model's forecast, although the data for the first nine months of 2020 suggest that the upward trend will be maintained. Moreover, for the market to continue to thrive, a rating must be compulsory for corporate bond issuers. A comparison of the ratings of individual issuers enables investors to analyze the risk and profitability of corporate bonds in an easier way. [ABSTRACT FROM AUTHOR]

Over the years it has become fashionable to argue that a vibrant bond market would be vastly superior to the present bank-led model of debt finance for industries and businesses in emerging economies. While it works well in most developed economies, in countries like India, despite all efforts of the central bank and the financial markets regulators or regulatory authorities, business firms still depend largely on the banking system for their debt capital funds. This study is an attempt to enquire into whether it is the measurable parameters such as cost of funds or the buoyancy in the economy that affects the firms’ deci-sions or not. If not, it would follow that other qualitative or behavioral (or non-measurable) factors may be responsible for the lack of firms’ appetite for issuing bonds.

While financial statement analysis is a rich tool, there is no widely used holistic measure of the amount of change in corporate financial statements. Statistical decomposition analysis has been employed as an index of the amount of change, but has fallen into disuse because it does not allow negative accounting numbers. As a remedy, this paper suggests three distance measures adapted from cluster analysis that avoid this critical data limitation. We successfully apply these proposed distance measures to explain the total and systematic risk of stock returns (in the CAPM and Fama–French model), corporate bond ratings, and corporate distress. [ABSTRACT FROM AUTHOR]

Using a novel dataset that records individual debt issues on the balance sheets of public firms, we demonstrate that traditional capital structure studies that ignore debt heterogeneity miss substantial capital structure variation. Relative to high-credit-quality firms, low-credit-quality firms are more likely to have a multi-tiered capital structure consisting of both secured bank debt with tight covenants and subordinated non-bank debt with loose covenants. We discuss the extent to which these findings are consistent with existing theoretical models of debt structure in which firms simultaneously use multiple debt types to reduce incentive conflicts. [ABSTRACT FROM PUBLISHER]

Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, undervalued minus overvalued) built from repurchase and issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation. [ABSTRACT FROM PUBLISHER]

Ample evidence points to a negative relation between internal funds (profitability) and the demand for external funds (debt issuance). This relation has been interpreted as evidence supporting the pecking order theory. We show, however, that the negative effect of internal funds on the demand for external financing is concentrated among firms that are least likely to face high external financing costs (firms that distribute large amounts of dividends, that are large, and whose debt is rated). For firms on the other end of the spectrum (low payout, small, and unrated), external financing is insensitive to internal funds. These cross-firm differences hold separately for debt and equity, and they are magnified in the aftermath of macroeconomic movements that tighten financing constraints. We argue that the greater complementarity between internal funds and external financing for constrained firms is a consequence of the interdependence of their financing and investment decisions. [ABSTRACT FROM AUTHOR]

We identify a specific channel (debt covenants) and the corresponding mechanism (transfer of control rights) through which financing frictions impact corporate investment. Using a regression discontinuity design, we show that capital investment declines sharply following a financial covenant violation, when creditors use the threat of accelerating the loan to intervene in management. Further, the reduction in investment is concentrated in situations in which agency and information problems are relatively more severe, highlighting how the state-contingent allocation of control rights can help mitigate investment distortions arising from financing frictions. [ABSTRACT FROM AUTHOR]

Financial distress is more likely to happen in bad times. The present value of distress costs therefore depends on risk premia. We estimate this value using risk-adjusted default probabilities derived from corporate bond spreads. For a BBB-rated firm, our benchmark calculations show that the NPV of distress is 4.5% of predistress value. In contrast, a valuation that ignores risk premia generates an NPV of 1.4%. We show that marginal distress costs can be as large as the marginal tax benefits of debt derived by Graham (2000) . Thus, distress risk premia can help explain why firms appear to use debt conservatively. [ABSTRACT FROM AUTHOR]

This article reports the results of an experiment designed to assess the impact of last-sale trade reporting on the liquidity of BBB corporate bonds. Overall, adding transparency has either a neutral or a positive effect on liquidity. Increased transparency is not associated with greater trading volume. Except for very large trades, spreads on newly transparent bonds decline relative to bonds that experience no transparency change. However, we find no effect on spreads for very infrequently traded bonds. The observed decrease in transaction costs is consistent with investors' ability to negotiate better terms of trade once they have access to broader bond-pricing data. [ABSTRACT FROM AUTHOR]

We find that liquidity is priced in corporate yield spreads. Using a battery of liquidity measures covering over 4,000 corporate bonds and spanning both investment grade and speculative categories, we find that more illiquid bonds earn higher yield spreads, and an improvement in liquidity causes a significant reduction in yield spreads. These results hold after controlling for common bond-specific, firm-specific, and macroeconomic variables, and are robust to issuers' fixed effect and potential endogeneity bias. Our findings justify the concern in the default risk literature that neither the level nor the dynamic of yield spreads can be fully explained by default risk determinants. [ABSTRACT FROM AUTHOR]

This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by, helps to explain recent increases in corporate bond yields. [ABSTRACT FROM AUTHOR]

In this paper, I use institutional corporate bond trade data to estimate transactions costs in the over-the-counter bond market. I find average round-trip trading costs to be about $0.27 per $100 of par value. Trading costs are lower for larger trades. Small institutions pay more to trade than large institutions, all else being equal. Small bond dealers charge more than large ones. I find no evidence that trading costs more for lower-rated bonds. [ABSTRACT FROM AUTHOR]

The purpose of this article is to explain the spread between rates on corporate and government bonds. We show that expected default accounts for a surprisingly small fraction of the premium in corporate rates over treasuries. While state taxes explain a substantial portion of the difference, the remaining portion of the spread is closely related to the factors that we commonly accept as explaining risk premiums for common stocks. Both our time series and cross-sectional tests support the existence of a risk premium on corporate bonds. [ABSTRACT FROM AUTHOR]

The development of organized markets for speculative-grade corporate debt has provided financial researchers with an opportunity to examine the pricing of default risk. By incorporating previous work on the default experience of low-rated corporate debt, this paper presents an introduction to risk-neutral models of risky-bond pricing and uses these to examine the relationship between the default premium embodied in bond yields and actual default rates. The contribution of macroeconomic information to the default premium is also examined. The author finds that holders of low-grade bonds have, on average, been compensated for losses due to default. [ABSTRACT FROM AUTHOR]

This study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable (industrial development and pollution control) and taxable corporate bonds. This procedure is shown to produce matched bond pairs that are comparable. Two hundred pairs of bonds are examined from the second quarter of 1973 through the second quarter of 1983. Testing of the marginal tax rate relationships indicates that the marginal personal tax rate is less than the corporate statutory tax rate. [ABSTRACT FROM AUTHOR]

The decision to refund a bond issue involves two questions: (1) Is it profitable to call an outstanding bond issue in the current period and replace it with a new issue? (2) Even if refunding now is profitable, would it be more profitable still to postpone refunding until a later period? In this paper we address ourselves to the problem of evaluating a bond refunding. The question of timing the refunding operation is not treated directly but, since proper evaluation of the benefits of refunding either now or in the future is essential to any timing strategy, the present analysis has a bearing on the timing decision. Although bond refunding has been widely recognized as a problem in capital budgeting, a survey of the literature reveals persistent disagreement on the appropriate method for evaluating the net benefits of bond refunding. Furthermore, none of the methods proposed in the literature has been derived explicitly from or shown to be consistent with the objective of maximizing shareholder wealth. In this paper we develop an analytical framework for the evaluation of a refunding operation which is rooted in security valuation theory. This is done by examining the link between the refunding decision and the valuation of a firm's securities in the market. The next section examines the different approaches to measuring the profitability of a refunding operation, the second section outlines a new approach, and the third section details the advantages of the new approach. [ABSTRACT FROM AUTHOR]

Over the past decade there have often been sizable differences between the offering yields on new issues of corporate bonds and the market yields on bonds of similar quality of the secondary market. In the latter half of the 1960's, this yield spread was consistently positive and at times quite large. For instance, in 1967, 1968, and 1969 Moody's average of offering yields on new Aa public utility issues exceeded Moody's series for seasoned utility issues with the same rating by an average of 40 basis points. In late 1970 and early 1971, the yield spread declined as interest rates fell, and in a number of instances negative yield spreads were observed. This paper examines the reasons for this yield spread and its fluctuations over time. Three hypotheses are presented and the evidence of past studies in support of each is analyzed; then the results of a study of the yield spread on corporate bonds issued competitively during the period January 1, 1964 through February 28, 1971 are reported. [ABSTRACT FROM AUTHOR]

While the value of listing equity securities has been researched extensively, no studies have examined the market reaction to the decision to list corporate debt. Since the listing of corporate bonds on the major exchanges is a significant corporate activity, this study examines the impact of bond listing on shareholder wealth. Using a variety of possible announcement dates as well as cumulative abnormal returns between dates, no detectable market reaction to debt listing is found. Therefore, the listing of corporate bonds does not appear to be valued by the common shareholders of those same firms. [ABSTRACT FROM AUTHOR]

In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards. [ABSTRACT FROM AUTHOR]

To investigate the liquidity of large issues, this study tests for yield differences between corporate bonds and medium-term notes (MTNs). In the sample, MTNs have an average issue size of $4 million, compared with $265 million for bonds. Among MTNs that have the same issuance date, the same maturity date, and the same corporate issuer, we find no relation between size and yields. Moreover, bonds and MTNs have statistically equivalent yields. Thus, rather than suggesting that large issues have greater liquidity, these findings indicate that large and small securities issued by the same borrower are close substitutes. [ABSTRACT FROM AUTHOR]

This article examines managerial ownership structure and return premia on corporate bonds. It is argued that when managerial ownership is low, an increase in managerial ownership increases management's incentives to increase stockholder wealth at the expense of bondholder wealth. When ownership increases more, however, it is argued that management becomes more risk averse, with incentives more closely aligned with bondholders. This study finds a positive relation between managerial ownership and bond return premia in the low to medium (5 to 25 percent) ownership range. There is also weak evidence for a nonpositive relation in the large (over 25 percent) ownership range. [ABSTRACT FROM AUTHOR]

This comment describes the U.S. federal income tax treatment of corporate bonds that are indexed for inflation and argues that these bonds do not have a tax-induced clientele in the United States. [ABSTRACT FROM AUTHOR]

Nobel Memorial Prize Lecture for presentation at the Royal Swedish Academy of Sciences in Stockholm, December 7, 1990. Helpful comments on an earlier draft were made by my colleagues Steven Kaplan and Robert Vishny. [ABSTRACT FROM AUTHOR]

This paper analyzes the circumstances under which tax considerations favor or disfavor the use of index-linked corporate bonds. Using a model similar to Miller's, investors' choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns. It is concluded that the absence of index- linked bonds in the U.S. cannot be attributed solely to tax reasons. However, following the 1986 Tax Reform Act, the tax code is expected to disfavor the use of index-linked bonds. [ABSTRACT FROM AUTHOR]

The article presents a progress report focusing on the market for corporate securities. The article examines how the economic forces, legal factors, and managerial decision-making of corporate securities and loans employees and institutions affect the quantity, form, and terms on which funds are made available to enterprises. An important part of the study is concerned with how monetary actions, resulting from central banking decisions, were distributed to the economy through their effects on the capital market.

The article presents commentary and criticism on the report "Direct Placements," by George T. Conklin, Jr., included within the issue discussing the economic analysis of distribution methods of corporate bond issues. A summary of Conklin's primary thesis and conclusions is provided, outlining his quantification of savings allocations brought on by direct placement strategies. An evaluation of the data sets utilized by Conklin and others on the subject is also given. Final points are made regarding the relationship of small insurance companies to direct placement policies.

The central question of this paper is "how well can corporate bond ratings be explained by available financial and operating statistics?" This question may be reversed to ask, "how important to the determination of bond ratings are the 'intangibles of judgment' and the data that are presumably available to the professional rater, but not available in widely published data on the firm?" To provide evidence on this question, we have estimated the parameters of several regression equations designed to explain variations in the bond ratings. Before addressing this question, the authors present some comments on the importance and history of bond ratings (Section It). Prior studies of bond ratings are reviewed in Section III. Section IV discusses statistical methods and data. Variables that are believed to Be relevant determinants of bond ratings are defined, and the samples of industrial, railroad, and public utility bonds used in this study are described. This study is limited to the first four bond quality ratings — namely, Aaa, Aa, A, and Baa for each of these three traditional industrial classifications. Five explanatory variables are used: earnings coverage, long-term debt to capitalization, profitability, earnings instability, and asset size. Average values of these explanatory variables for each quality rating and industrial classification for the period 1961 through 1966 are also presented in this section. When presenting the empirical results of the study (Section V), we discuss the relative importance of the five variables in the statistical explanation of bond ratings, as well as their overall ability to explain bond ratings. [ABSTRACT FROM AUTHOR]

We find that short-maturity investment-grade corporate bonds perform better, controlling for risk differences, than similar bonds with longer maturities. Our results are at least partially attributable to insurance companies' trading behavior and align with the preferred-habitat theory of the term structure. We find that insurance-company purchases create a strong demand for long-term bonds and that their rebalancing activity results in sales of short-term bonds. As documented by extant literature, such demand-supply imbalance is not easily resolved by arbitrageurs or firms seeking to time the market with bond issuance. [ABSTRACT FROM AUTHOR]

The Kim and McConnell paper represents a stimulating and creative endeavor to learn more about the valuation of corporate debt instruments--in this case, under the circumstances of a merger. It, along with certain other recent work, represent significant advances in an area that largely has been passed over in the theoretical and empirical development of the field. I commend the authors on their choice of subject matter and on their contribution. While specific criticisms are in order, on balance I found the paper to be very worthwhile. The authors examine the "financial synergism" or "debt coinsurance" proposition advanced by Lewellen some six years ago at these meetings, as modified by Higgins and Schall in a recent Journal of Finance article. In essence, the argument is that by merging the debt capacity of the combined entity rises relative to the sum of the debt capacities of the individual companies. The fused cash flows are less risky; and lenders are unable to obtain this risk reduction on their own. Hence, the value of the debt rises under perfect market assumptions and equity values fall because of the value additive principle. As an aside, it has struck me that implicitly implied in this argument is that a degree of segmentation exists between debt and equity markets. That is, there is not the ability to invest in both the debt and equity instruments of a company. [ABSTRACT FROM AUTHOR]

The article presents commentary on a paper written by Theodore Levitt entitled "Investment, Depression, and the Assurance of Prosperity," which appeared in the September, 1954 edition of the "Journal of Finance." In that paper Levitt described a proposal under which the U.S. government would guarantee the yields on bonds issued by certain industries. The author of the current paper faults Levitt's ideas on several grounds. He views the plan as an unwise intrusion by the government into free markets, and questions how the "selected industries" targeted by the plan would be chosen.

I examine the time-series variation in corporate credit rating standards from 1985 to 2007. A divergent pattern exists between investment-grade and speculative-grade rating standards from 1985 to 2002 as investment-grade standards tighten and speculative-grade loosen. In 2002, a structural shift occurs toward more stringent ratings. Holding characteristics constant, firms experience a drop of 1.5 notches in ratings due to tightened standards from 2002 to 2007. Credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate. Rating standards affect credit spreads. Loose ratings are associated with higher default rates. [ABSTRACT FROM AUTHOR]

We present a model with agency costs where heterogeneous firms raise finance through either bank loans or corporate bonds and where banks are more efficient than the market in resolving informational problems. We document some major long-run differences in corporate finance between the United States and the euro area, and show that our model can explain those differences based on information availability. The model fits the data best when the euro area is characterized by lower availability of public information about corporate credit risk relative to the United States, and when European firms value more than United States firms banks' flexibility and information acquisition role. [ABSTRACT FROM AUTHOR]

We examine how country-level legal and institutional investor protection shapes contractual creditor protection. We examine debt covenant information from foreign corporate bonds issued in the US from more than 50 countries between 1991 and 2007. We find that bonds of firms incorporated in countries with stronger creditor rights use fewer covenants. This finding suggests that creditor protection substitutes for covenants in reducing the agency cost of debt. In contrast, bonds of firms with stronger shareholder rights or firms with stronger firm-level corporate governance use more covenants. These findings support the notion that firms with stronger shareholder control may face an increase in the shareholder-bondholder conflict and therefore prefer to use more covenants. However, greater shareholder rights are not associated with the use of more covenant restrictions on equity issuance, as firms with greater minority shareholder protection are unlikely to suffer such equity dilution. [ABSTRACT FROM AUTHOR]

The financial contracting in private placement bonds and publicly offered bonds are different. Our data show that private placement bonds are more likely to have restrictive covenants than public bonds. Private placement bonds are also more likely to be issued by smaller and riskier firms. For investment-grade firms that issue bonds in both markets, our analysis shows that firms select the bond type to minimize financing costs. We find significant differences in the pricing of private placement and publicly offered bonds, and some of these differences appear to be related to the different institutional features between the two markets. [ABSTRACT FROM AUTHOR]

We argue that time variation in the maturity of corporate debt arises because firms behave as macro liquidity providers, absorbing the supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with more short-term debt, firms fill the resulting gap by issuing more long-term debt, and vice versa. This type of liquidity provision is undertaken more aggressively: (1) when the ratio of government debt to total debt is higher and (2) by firms with stronger balance sheets. Our theory sheds new light on market timing phenomena in corporate finance more generally. [ABSTRACT FROM AUTHOR]

The objective of this paper is to examine the association between the Corporate Leverage (cl) and the Dividend Policy (dp) of firms across industries in India in respect of Size of Corporate Firms. The investigation is conducted on a panel sample of 73 firms across industries [Cement, Chemical and Fertilizer, it, Oil and Gas, Pharmaceutical, Shipping, and Textiles], which listed their shares in National Stock Exchange (nse) in India for the period 1996-2007. The impacts of Capital Structure (cs) variables (leverage) on dp measures - dividend payout (Net dividend paid/net income) in the presence of some basic fundamental variables are considered to be the determinants of dp, using the Multiple Regression Technique (ols method). The results of the cross-sectional ols Model for the selected sample firms under various sectors show that there is a significant effect of selected independent variables, dpoα+β1dpot-1 +β2pat+β3tde+β4cf+β5size+β6inv+ β1ltd + β8std + e. Therefore, this study proves that the dp of Small Size, Medium Size, Large Size, and Overall Corporate Firms across industries in India is dependent on the level of debt in cs. [ABSTRACT FROM AUTHOR]

Using a sample of over 5,000 debt issues, I test whether firms with more extensive use of covenants in their public debt contracts exhibit timelier recognition of economic losses in accounting earnings. Covenants govern the transfer of decision-making and control rights from shareholders to bondholders when a company approaches financial distress and thereby limit managers’ abilities to expropriate bondholder wealth. Covenants are expected to constrain managerial opportunism, however, only if the accounting system recognizes economic losses in earnings in a timely fashion. Thus, the demand for timely loss recognition should increase with a contract's reliance on covenants. Consistent with this conjecture, I find evidence that reliance on covenants in public debt contracts is positively associated with the degree of timely loss recognition. I also find evidence that the presence of prior private debt mitigates this relationship. [ABSTRACT FROM AUTHOR]

We examine whether state laws impact the use of debt covenants by using a sample of U.S. public bond issues from 1987 to 2004. We consider variation in state laws with respect to the minimum asset-to-debt ratio necessary for a payout and with respect to antitakeover statutes. We find that firms incorporated in states with stricter restrictions on distributions are less likely to include debt covenants that constrain payouts, limit additional debt, or restrict the sale of assets. Thus, state payout restrictions appear to be a substitute for the use of these debt covenants. On the other hand, firms incorporated in states with stronger antitakeover statutes are somewhat more likely to use debt covenants. This finding is consistent with the notion that firms with antitakeover protection are more likely to suffer from agency problems and, thus, are more likely to use debt covenants to minimize agency costs. [ABSTRACT FROM AUTHOR]

This paper examines the hypothesis that the timing of lockup expiration is crucial to earnings management (EM) behavior in the period after an initial public offering (IPO). Taiwan's unique two-stage lockup regulations make the Taiwanese sample an excellent candidate for examining this hypothesis. Three main results are reached. First, we find positive discretionary accruals (DAs) from the IPO quarter to the quarter after the expiration of the first-stage lockup. The DA in the quarter of the second-stage lockup expiration is significantly positive. The evidence shows that the lockup provision is key in the findings of significant EM in the IPO year and the following year. We also find a positive association between DAs in first-stage lockups and subsequent insider selling activity, indicating that insiders' selling after lockup expiration accounts for EM in the lockup period. Third, the extent of EM in first-stage lockup is negatively related to that around the IPO, consistent with the reversal nature of DAs. [ABSTRACT FROM AUTHOR]