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This study employs the fractional multinomial logit setting proposed by Papke and Wooldridge (1996) to examine factors driving the choice among nonbank private (144A) debt, bank loans and public debt made by 988 nonfinancial firms during 1993–2007. We document that the majority of firm-level factors have persistent effects on corporate outstanding debt mix across economic conditions. We also highlight the importance of macroeconomic variables on firms’ borrowing decisions as predicted by Diamond (1991). Finally, we document a substitution effect among debt financing sources due to credit rating downgrades, which is inconsistent with Rauh and Sufi (2010).

We investigate the ex-post effects of the Basel II reform on the debt costs of German small and medium-sized enterprises (SMEs). We assume that Basel II formalized the credit assessment procedure of banks and that especially SMEs might face higher costs of debt as they tend to have comparably high proportions of bank credit, and consequently lower ratings than bigger companies. Beyond that, banks might try to refinance those additional rating costs by imposing higher interest rates on debtors. The results presented in our paper indicate a significant overall rise of debt costs of SMEs that have debt relations with IRBA-certified banks since 2007. Furthermore, low-risk companies benefit from comparably lower loan rates, whereas risky firms face comparably higher loan costs than before. The results are less obvious for SMEs that are rated under RSA, but still present for highly risky companies. We test for several influences of the financial crisis. However, we do not find convincing arguments that would reason a rise of the costs of debt in regard of the crisis. Yet, we still observe higher debt costs of SMEs, particularly of highly risky companies, since 2007 that indicate a change of bank lending behavior in Germany.

We propose a pricing model for corporate securities issued by a levered firm with the possibility of debt renegotiation, where the firm’s earnings follow a geometric Brownian motion with stochastic collaterals. While equity holders can default the firm when the earnings become insufficient, they may liquidate it by repaying the face value of debt when the value of collaterals becomes sufficiently high. Unlike the existing models, the bivariate structure enables us to distinguish strategic default, liquidity default and ordinary liquidation, which makes the contribution of strategic debt service to credit spreads lower than that obtained in the previous models.

This paper examines a firm’s investment/financing decision when it uses loan-commitment-type debt with performance-sensitivity features. This analysis is of interest because most corporate borrowing today is by means of private debt, which tends to be of the loan-commitment type as well as contain performance-sensitivity provisions. We show that, except for the case of low leverage ratio, performance-sensitive debt makes shareholders better off relative to fixed-coupon debt. In particular, when the leverage ratio is chosen optimally, performance-sensitive debt dominates fixed-coupon debt and the resulting addition to shareholder wealth can be economically significant for reasonable parameter values. Therefore, it is not surprising that performance-sensitive debt has become so popular in the private debt market. The magnitude of shareholder wealth created by using performance-sensitive debt rather than fixed-coupon debt is an increasing function of earnings growth rate and tax rate, and a decreasing function of interest rate, earnings volatility and bankruptcy cost. Therefore, performance-sensitive debt financing is more likely to be used when earnings growth rate and tax rate are high, and interest rate, earnings volatility and bankruptcy cost are low.

We test the impact of debt capacity on firms’ simultaneous decisions of leverage and debt maturity in reducing underinvestment problems. Examining 24 OECD countries for the period between 1990 and 2011, we find strong evidence, that, unlike previous studies, the role of leverage and debt maturity in reducing underinvestment problems is not homogeneous across firms with varied debt capacity. We find new evidence that, when firms face lower debt capacity constraints, they benefit from their ability to use a greater amount of debt if they shorten their debt maturity, or gain from using longer maturity of debt if they decrease their leverage to reduce underinvestment problems. Our results suggest that they also benefit from the ability of their firms to gain from interest tax shields by financing more with debt or long-term debt, and hence use debt maturity and leverage as strategies substitutes. However, when firms are constrained by concerns over debt capacity, they tend to opt for a lower level of debt that is mainly short-term to reduce the underinvestment problem. Our results suggest that firms with lower debt capacity cannot completely resolve their underinvestment problems by using short-term debt or low leverage, implying that the effects of the liquidity risk outweigh those of underinvestment problems, and hence impose a constraint on firms’ choice of debt.

In our paper we contribute to the burgeoning literature in the psychology of debt repayment. Across three experiments, we explore the effects of the type (hedonic or utilitarian) and the timing of debt on consumers' debt repayment when managing multiple debt accounts. While prior literature has demonstrated that debtors who own multiple credit cards behave irrationally by paying down smaller balances rather than balances with higher interest rates, we found that debts incurred for hedonic purchases and in the distant past (versus proximal past) amplify this effect. The anticipated impact of debt repayment on consumption enjoyment is found to mediate this effect.

To what extent is public debt private liquidity? Much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households. This is the case for ad-hoc debt limits, which are exogenous to public policy. Instead, if debt limits are fully endogenous, as e.g. in the case of the natural borrowing limit, public debt has no impact. We assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that public debt provides some liquidity, but less so than it would if constraints were imposed ad-hoc. We show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions, such as for the welfare effects of government debt or its impact on real economic activity.

Foreign subsidiaries in Korea operate under a classical system where double taxation of corporate and personal income provides interest tax shields, while domestic subsidiaries are under an imputation system where preference for debt is largely eliminated. We find that foreign subsidiaries’ overall leverage is not higher than domestic subsidiaries, while the former's internal leverage is higher than the latter's. Moreover, foreign subsidiaries with excess foreign tax credit use more internal debt when home corporate tax rate is low. These findings suggest that taxes have a first order impact on internal debt when parent companies hold both debt and equity, but not on external debt.

The significance of debt relations is constantly growing in the present-day world, so do economic problems related to debt. Credit relationships on market are usually treated as morally neutral despite the fact that debt generates a number of moral contradictions. This paper suggests an understanding of debt that draws on the anthropological theory of gift. It enables to expose the moral content of the utilitarian market exchange as compared to gift exchange and to differentiate between various forms of debt. This approach is used for analyzing consumer credit and for demonstrating that debtor’s behavior is paradoxically determined by striving to avoid the moral obligations of debt. The main moral imperatives are indicated that govern consumer credit - independence and necessity, calculativeness and quantification. This article demonstrates that making the borrower responsible for growing debt makes credit burden increasing rather than restraints it.

Credit, debt and indebtedness are key terms for understanding contemporary social and economic life. In many recent accounts of debt, however, debt is largely an ahistorical category that remains constant throughout time, or seen simply in terms of a quantum of interest accrued over time that can then serve as a proxy for both the accumulation of profit and measurable oppression and exploitation. This forecloses analytical investigation of contemporary shifts in the everyday articulations of credit and debt and the specificity of creditor–debtor relations, including important changes in the nature of debt itself. In contrast, this paper focuses on the redefinition of debt as ‘leverage’, a dynamic, productive force that can have unpredictable effects. Alongside other developments that have transformed debt into a tradeable asset, such as financial securitization, debt as ‘leverage’ involves the anticipation of speculative excess and possibility. Addressing the contemporary transformations of credit/debt al...

We introduce debt issuance limit constraints along with market debt and bank debt to consider how financial frictions affect investment, financing, and debt structure strategies. Our model provides four important results. First, a firm is more likely to issue market debt than bank debt when its debt issuance limit increases. Second, investment strategies are nonmonotonic with respect to debt issuance limits. Third, debt issuance limits distort the relationship between a firm's equity value and investment strategy. Finally, debt issuance limit constraints lead to debt holders experiencing low risk and low returns. That is, the more severe the debt issuance limits are, the lower are the credit spreads and default probabilities. Our theoretical results are consistent with stylized facts and empirical results. (C) 2014 Elsevier B.V. All rights reserved.

We investigate the impact of large swings in the housing market on nonmortgage borrowing, including student, credit card, auto, and home equity debts. For this purpose, we use CoreLogic geographic house price variation, matched with rich data on consumer liabilities from the Equifax-sourced FRBNY Consumer Credit Panel. The length and timing of our panel allow us to study the consumer debt portfolio response to house price changes during a boom-and-bust cycle of historic magnitude as well as during more ordinary times. In first-differenced instrumental variables estimation, we find that during 1999-2001, homeowners substituted out of nonhousing (largely credit card) debt and into home equity-based debt at a nearly dollar-for-dollar rate in response to house price increases. During the housing boom of 2002-06, however, homeowners abandoned the practice of substituting into less costly debt as equity grew, and instead increased obligations across the board. From 2007-12, sample homeowners experienced a 23 percent average house price decline, and withdrew from home equity debt without adding to non-housing debt. We observe substantial heterogeneity in this pattern: Substitution in both 1999-2001 and 2007-12 ranges from 50 cents to more than dollar-for-dollar for older and prime borrowers, while the decidedly nonprime borrow more modestly, show less evidence of substitution, and shed large amounts of all types of debt from 2007-12. Finally, difference-in-differences and FD-IV estimates are consistent with both 1) a 2012 relative debt overhang of at least $1,800 on average, despite little remaining home equity advantage, for homeowners who experienced a more pronounced boom-and-bust cycle and 2) little substitution out of home equity debt into student loans in response to recent house price declines.

We analyze why firms use nonintermediated short-term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start-up financing for capital investment. Firms� CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long-term bond issuance to reduce rollover risk.

The problem of sovereign debt management is a recurring issue in international relations. In the first quarter of the twenty-first century, the sovereign debt problem caused by the international fi...

Summary We examine when government debt crowds out investment for the US economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced-form regressions are inconclusive about crowding out. At longer horizons, distortionary financing is important for the negative investment response to debt. Copyright © 2013 John Wiley & Sons, Ltd.

This study examines the association between debt maturity structure and accounting conservatism. Short-maturity debt can mitigate agency costs of debt arising from information asymmetry and suboptimal investment problems inherent in debt financing. As such, debt-contracting demand for accounting conservatism is expected to be lower in the presence of more short-maturity debt. We find that short-maturity debt is negatively associated with accounting conservatism. As firms could commit to more accounting conservatism to gain access to long-maturity debt, we conduct lead-lag tests of the direction of causality, and the results suggest that more short-maturity debt leads to less conservative reporting, rather than the reverse. We also find the negative relation between short-maturity debt and accounting conservatism is more pronounced among financially distressed firms, where ex ante severity of agency costs of debt are higher. Collectively, our results contribute to our understanding of the role of accounting conservatism in debt contracting and show how debt maturity, a key and pervasive feature of creditor protection in debt contracting, affects accounting conservatism.

This paper examines the interaction between innovation and financial structure under monopoly. We characterise the effects of debt levels on innovative investment by considering a limited liability effect. On one hand, higher debt levels promote both innovative investment and the outputs. On the other hand, shareholders’ net benefits are reduced by higher debt levels and net profit per debt is correspondingly reduced by higher debt level under positive net profit. More importantly, this study captures the interaction between financial structure and industrial organisation without restriction of the interior point.

The International Monetary Fund and the European Stability Mechanism softened their crisis lending policies repeatedly to deal with the Greek debt crisis, but the analysis of debt sustainability still acts as the gatekeeper for access to official financing. We explore the underlying mechanics of debt sustainability analysis and show that the standard model is inappropriate for Greece since it ignores the highly concessional terms of Greek debt. Greek debt has been restructured repeatedly, and now two-thirds of the stock contains grant elements of about 54 percent. The present value of outstanding Greek debt is currently about 100 percent of GDP and will rise to about 120 percent under the new program. Greek debt sustainability therefore is less a problem of the debt stock. By simulating different paths of the gross financing needs, we show that there may be liquidity problems over the medium to long terms (in particular, in 2035 and beyond). However, our estimation of the financing need is subject to high uncertainty and mainly depends on whether Greece will be able to regain access to markets at reasonable terms.

The current public sector financial management reforms agenda within the state-owned corporations in Kenya aimed at integrating and aligning their performance to vision 2030, has not yet achieved the traction required. This study, therefore, examined the different types of debt financing strategies applied by the various state-owned corporations in Kenya, in comparison to those applied by state-owned corporations from developed and developing economies. The study specifically revealed that private debt financing, through bank loans and payables is commonly used amongst Kenyan state-owned corporations. While, most state-owned corporations from developed and developing economies, such as in America, Europe, Asia and South Africa, use public debt financing, through financial securities, traded in both domestic and international capital markets.

We model dynamic investment, financing and default decisions of a firm, which begins its life with a collection of growth options. The firm exercises them optimally over time, and finances the costs of investment by adjusting its capital structure, which trades off the tax benefits with the distress cost of debt and the agency cost of investment distortions from potential debt overhang. Conflicts of interests between equityholders and various classes of debtholders are managed through optimal choice of investment triggers, capital structure, and default triggers. We show that (i) existing debt may significantly distort investment decisions (debt overhang and risk shifting); (ii) anticipating distortions induced by debt, firms with more growth options on average have lower leverages, consistent with empirical evidence; (iii) the priority structure of debt has significant effects on the firm’s default, leverage, and investment decisions, when existing debt is exogenously given; (iv) when the future growth options are perfectly anticipated, the firm optimally chooses its initial investment, default triggers and capital structure decisions, so as to mitigate the anticipated endogenous debt overhang. In this case, financial contracting plays a less prominent role.

open access article Unconventional approaches to suit unusual circumstances have become acceptable in monetary policy, a formerly highly conservative discipline. In this paper it is argued that unconventional approaches should also be considered in sovereign debt management, in order to contribute to resolving the eurozone sovereign debt crisis. First, the Troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard IMF post-crisis lending. The main difference and shortcoming is the unsustainable character of the eurozone approach, due to the omission of demand stimulation components. To address this and other shortcomings, the features of an ideal alternative funding tool are identified. It would solve the funding problems of affected sovereigns, help stabilise the banking system, but most of all stimulate domestic demand and hence end the vicious downward spiral. It is found that this funding method can be implemented as part of enhanced public debt management by each nation's debt management office.

We study the determinants of the maturity structure of public debt, taking as case study the regional governments of Spain. The structure of public debt is a source of vulnerability and contagion in public debt markets. Our empirical models show that regional governments reacted to increasing financing needs by leaning more toward short-term debt, instead of resorting to longer-term debt to seek the minimization of liquidity risks, a fact that is consistent with theories that predict the willingness of public financial managers to reveal to the markets their fundamental solvency and their commitment to fiscal (consolidation) plans. At the same time, we find that increased central government transfers raise the tendency of markets to hold long-term instruments, which may reflect their expectation that regional debt be bailed out/guaranteed by the center. Finally, we do not find evidence of significant differences in the maturity structure depending on the quality of the issuer.

Sustainability of government debt is a finance priority in most countries of the world. Ideally, government debt should be sustainable at all times. Unfortunately, this is almost never the case in contemporary stochastic economy. Therefore, government debt stabilization tools are employed to contribute to the sustainability of the government debt or maintain the acceptable level of the debt. Selection of government debt stabilization tools depends on many factors, one of which is monetary policy arrangement. Such factors as size and openness of the economy are also crucial for development of government debt management strategy. The objective of the paper is to analyse the peculiarities of government debt stabilization in a small open economy within currency board system. The main research methods used are systematization and generalization of the scientific literature, quantitative and qualitative analysis of the primary and secondary data, case study, scenario method, graphic presentation of the data and results. C***onclusions of the paper provide the brief review of the main results and findings, revealing the peculiarities of plausible tools and strategy for government debt stabilization in a small open economy within currency board system.

Наукова праця була присвячена дослідженню однієї з найважливіших категорій економічного розвитку, а саме державному боргу України. Дефіцит державного бюджету, залучення та використання позик для його покриття призвели до формування і значного зростання державного боргу в Україні. Поточна економічна ситуація в Україні характеризується загрозливим зростанням боргового навантаження, що виступає одним з базових факторів гальмування розвитку економіки країни. Основними причинами зростання обсягу державного боргу стали: безпрецедентна політична криза та тривалий військовий конфлікт на сході країни; глибока економічна рецесія, викликана перегрупуванням економічних зав’язків з міжнародними партнерами та руйнуванням інфраструктури та промислових об’єктів на частині території країни; фінансування за рахунок державних запозичень дефіциту державного бюджету, зростання якого обумовлене в значній мірі збільшенням видатків на оборону та обслуговування державного боргу. Великі розміри внутрішнього і зовнішнього боргу, а також відповідно зростання витрат на його обслуговування обумовлюють необхідність вирішення проблеми державного боргу, а відтак і пошуку шляхів вдосконалення механізму його управління. Чим обтяжливішим стає для держави нагромаджений зовнішній та внутрішній борг, тим його обслуговування активніше включається у взаємодію з функціонуванням економіки та її фінансової системи. Тому у статті була запропонована класифікація зовнішньої заборгованості України, яка дасть змогу виявити фінансові загрози, які можуть постати перед Україною. У статті також була розглянута структура та проаналізована динаміка зовнішнього боргу за 2008-2015 рр. This scientific work has been devoted to research one of the most important categories of economic development, namely the government debt of Ukraine. The state budget deficit, attracting and using loans to cover this deficit has led to the formation of a significant increase in government debt in Ukraine. The current economic situation in Ukraine is characterized by threatening the growth of the debt burden, which is one of the basic factors slowdown of the economy. The main reasons for the growth of public debt are: an unprecedented political crisis and the continued military conflict in the east; deep economic recession caused by the rearrangement of economic ties with international partners and the destruction of infrastructure and industrial projects in parts of the country; funding the state budget deficit from government borrowing, which growth is largely due to increasing defense spending and public debt service. The large size of the internal and external debt, increase of costs for maintenance of this debt necessitated to solve the problem of national debt, and therefore find ways to improve its management mechanism. The more burdensome accumulated external and internal debt are for the state, the more maintenance involved in the interaction with the functioning of the economy and its financial system. Classification of external debt of Ukraine is proposed in the article, which will help to identify financial threats that Ukraine faces. It also was reviewed and analyzed the structure of external debt dynamics for the 2008-2015. Научная работа была посвящена исследованию одной из важнейших категорий экономического развития, а именно государственному долгу Украины. Дефицит государственного бюджета, привлечение и использование займов для его покрытия привели к формированию и значительному росту государственного долга в Украине. Текущая экономическая ситуация в Украине характеризуется угрожающим ростом долговой нагрузки, которая выступает одним из базовых факторов торможения развития экономики страны. Основными причинами роста объема государственного долга стали: беспрецедентный политический кризис и длительный военный конфликт на востоке страны; глубокая экономическая рецессия, вызванная перегруппировкой экономических завязок с международными партнерами и разрушением инфраструктуры и промышленных объектов на части территории страны; финансирование за счет государственных заимствований дефицита государственного бюджета, рост которого обусловлен в значительной степени увеличением расходов на оборону и обслуживание государственного долга. Большие размеры внутреннего и внешнего долга, а также соответственно рост расходов на его обслуживание обусловливают необходимость решения проблемы государственного долга, а затем и поиска путей совершенствования механизма его управления. Чем обременительнее становится для государства накопленный внешний и внутренний долг, тем его обслуживания активнее включается во взаимодействие с функционированием экономики и ее финансовой системы. Поэтому в статье была предложена классификация внешней задолженности Украины, которая позволит выявить финансовые угрозы, которые могут возникнуть перед Украиной. В статье также была рассмотрена структура и проанализирована динамика внешнего долга за 2008-2015 гг.

This paper investigates whether the market level of information asymmetry affects firms’ debt financing decisions. Using a sample of non-financial listed firms and a composite index based on microstructure measures of information asymmetry, we find that firms with more information asymmetry use shorter debt maturities. In addition, we find that these firms face more difficulties to access public debt and bank debt (particularly, short-term bank debt), and they have to rely on trade credit as an alternative source of short-term financing. Analyzing the associations in two subsamples based on firm size, we find that our results essentially driven by smaller companies, which are those affected by higher information asymmetries. Our findings support the information asymmetry theories of trade credit: as information asymmetry increases and, consequently, listed firms face more constraints in the credit markets, they increase the use of financing provided by their suppliers. David Abad acknowledges financial support from the Ministerio de Economía y Competitividad through Grants ECO2013-4409-P and ECO2014-58434-P. José Yagüe acknowledges financial support from Fundación Caja Murcia.

This study examines the impact of audit opinions on the cost of debt based on accounting education and knowledge management theory. The empirical results of whole sample regression show that audit opinions are negatively correlated with the cost of debt and financial marketization weakens the effect of audit opinions on debt pricing. The subsample regression results of audit opinions indicate that financial marketization is negatively correlated with the cost of debt only in companies with modified audit opinions. This implies that audit opinions play a more important role in debt pricing compared to the financial marketization of companies’ localities.

Do government financial assets help improve public debt sustainability? To answer this question, we assemble a comprehensive dataset on government assets using multiple sources and covering 110 advanced and emerging market economies since the late 1980s. We then use this rich database to estimate the impact of assets on two key dimensions of debt sustainability: borrowing costs and the probability of debt distress. Government financial assets significantly reduce sovereign spreads and the probability of debt crises in emerging economies but not in advanced economies, and the effect varies with asset characteristics, notably liquidity. Government finacial assets also help discriminate countries across the distribution of sovereign spreads, thus signaling information about emerging economies’ creditworthiness.

Much of the recent literature concerning the federal debt and the problems of debt management has been primarily concerned with broad issues of public policy. This chapter outlines some of the questions which the fact of the debt has posed to private financial management and indicates some of the ways in which these questions impinge upon the larger issues of public policy and upon matters usually considered as strictly within the orbit of economic theory. The appearance in the economy of a very large federal debt has introduced a new element into the field of property management and has furnished private financial management with a new vehicle. In substance, the creation of the debt has given a most important medium of investment to officers of both financial and nonfinancial corporations, as well as to individual investors, that they did not formerly possess. The chapter considers the relationship of the government portfolio to the cash account.

A small amount of fixed-interest public debt may raise economic growth, if the financial sector is monopsonistic. We show that there are also redistributive gains favouring financial outsiders, defined by their lack of access to a stock exchange. The requirements are that issuing public debt raises the monopsony interest rate, thus reduces the value of financial sector equity, which, like public debt, is another source of crowding-out.

ACL-2; International audience; This paper uses a probabilistic approach to simulate the medium-term public debt trajectories of several major emerging market countries. We extend the standard debt sustainability analysis framework so as to more faithfully reproduce these countries’ economic reality in two aspects. First, we allow them to differ in the cyclical stance of their fiscal policy and in their degree of fiscal responsiveness to debt. Second, we explicitly integrate the specific risk premium paid by each country when borrowing in foreign currency. It allows us to evaluate the impact of alternative policies that the government may consider to improve sustainability. The results lead to three policy recommendations: i) a country should consider decreasing its exposure to currency risk only in extreme cases (like Argentina); ii) on the contrary, greater fiscal responsiveness (i.e. stronger fiscal tightening whenever there is a debt increase) could enhance sustainability to a much greater extent; iii) countries with low responsiveness to debt or a poor fiscal consolidation track record should be cautious with countercyclical fiscal policies, as they may trigger an unsustainable debt trajectory in the trough of the economic cycle.

The article investigates the structure and dynamics of public debt of Latvia for the period from 2006–2016 year. The relevance of the study long-term effects of public debt on the economy of Latvia is predetermined by a significant increase in its volume of low GDP growth rates in recent years. This article discusses conceptual approaches and criteria for evaluation of the public debt. An analysis of the main reasons for the growth of public debt of Latvia after joining the EU, considers its specific characteristics and consequences as compared with the more developed EU countries on the basis of these annual reports of Latvia Treasury over the past ten years. Analysis of the structure of the debt of Latvia on maturity shows that an effective public debt management necessarily involves consideration of the long-term effects of the growth of public debt to the public. High level of the external indebtedness in the structure of Latvian public debt is a factor of the growth of “debt overhang” even following Maastricht criterions of public debt. As a result of the research is justification of differentiated approach necessity to the evaluation of public debt with considering of intertemporal effects.

Sovereign borrowers differ from private borrowers. Among other differences, creditors lack strong legal enforcement rights against sovereigns, and there is also no bankruptcy to ensure a collectively-binding debt adjustment. Because of these differences, the academic literature on sovereign debt tends to downplay the relevance of law and legal techniques. In particular, the literature does not pay much attention to the terms of sovereign loan contracts. The assumption seems to be that contract terms do not matter without strong legal enforcement rights. Yet this assumption is at odds with the evidence from practice. For hundreds of years, sovereign borrowers and their lenders have negotiated detailed loan contracts as if the terms matter. Drafters have also revised loan contracts to account for changes in the political, economic, and legal climate. This chapter explores the role that contracts play in the market for sovereign debt, focusing on clauses found in sovereign bonds.

We consider a two-period Bayesian trading game where in each period informed agents decide whether to buy an asset (“government debt”) after observing an idiosyncratic signal about the prospects of default. While second-period buyers only need to forecast default, first-period buyers pass the asset to the new agents in the secondary market, and thus need to form beliefs about the price that will prevail at that stage. We provide conditions such that coarser information in the hands of second-period agents makes the price of debt more resilient to bad shocks not only in the last period, but in the first one as well. We use this model to study the consequences of issuing debt denominated in domestic vs. foreign currency: we interpret the former as subject to inflation risk and the latter as subject to default risk, with inflation driven by the information of a less-sophisticated group of agents endowed with less precise information, and default by the information of sophisticated bond traders. Our results can be used to account for the behavior of debt prices across countries following the 2008 financial crisis, and also provide a theory of “original sin.”

We build a theory of corporate debt maturity based on two empirically relevant observations: 1) firms tend to issue bonds with different maturities, and 2) firm’s often have multiple creditors. Splitting debt financing into multiple debt maturities (maturity dispersion) serves two purposes. It allows firms to sell a larger proportion of risky debt claims to investors who value them most, and it limits the amount of debt issued on a single (concentrated) maturity profile; both purposes reduce financing costs. We characterize when a dispersed versus concentrated debt maturity profile is optimal based on measurable parameters such as the growth potential of the investment, managerial beliefs, and cash-flow shocks. We show that the interaction between these parameters determines the optimal debt liability structure in subtle ways. Our theory highlights the importance of agent heterogeneity in explaining the issuance of maturity-specific debt claims, and the value of debt financed investments.

Recurrent concerns over debt sustainability in emerging and developed nations have prompted renewed debate on the role of fiscal rules. Their optimality, however, remains unclear. We provide a quantitative analysis of fiscal rules in a standard model of sovereign debt accumulation and default modified to incorporate quasi-hyperbolic preferences. For reasons of political economy or aggregation of citizens' preferences, government preferences are present biased, resulting in over-accumulation of debt. Calibrating this parameter with values in the literature, the model can reproduce debt levels and frequency of default typical of emerging markets even if the household impatience parameter is calibrated to local interest rates. A quantitative exercise finds welfare gains of the optimal fiscal policy to be economically substantial, and the optimal rule to not entail a countercyclical fiscal policy. A simple debt rule that limits the maximum amount of debt is analyzed and compared to a simple deficit rule that limits the maximum amount of deficit per period. Whereas the deficit rule does not perform well, the debt rule yields welfare gains virtually equal to the optimal rule.

Controversies surrounding the European sovereign debt crisis loom prominent in the public debate. From a legal perspective, the no-bailout rule and the ban on monetary financing constitute the main principles governing the legality review of financial assistance and liquidity measures. Interpretation of these rules are full of empirical claims. According to conventional legal doctrine, bond spreads only depend on the country’s debt position, largely ignoring other causal factors including liquidity. We test the hypotheses implicit in conventional legal reasoning. We find evidence that a significant part of the surge in the spreads of the peripheral Eurozone countries was disconnected from underlying fundamentals and particularly from a country’s debt position, and was associated rather strongly with market sentiments and liquidity concerns. We apply our empirical findings to the legal principles as interpreted by recent jurisprudence arguing that application of the no-bailout principle and the ban on monetary financing should be extended to capture non-debt related factors. Also, the empirical results suggest taking recourse to alternative legal grounds for reviewing the legality of anti-crisis instruments and allowing for a lender of last resort in the euro zone.

We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio. Abstract We develop a model with financial frictions and sovereign default risk where the maturity of public debt is allowed to be larger than one period. When the debt portfolio has longer average maturities, public debt increases less in the event of a crisis, reducing the size of the subsequent fiscal consolidation through distorsionary taxes or public spending, with positive effects on welfare. In addition, we provide some results suggesting that optimized fiscal responses to a crisis depend on the average maturity of the debt portfolio.

In this paper we examine the link between state ownership and the choice of public debt versus bank debt in an international context. Using a large sample of privatized firms from 62 countries over the 2001-2014 period, we find that state ownership is significantly positively associated with the use of bank debt financing, suggesting that privatized firms benefit from the soft budget constraint associated with state ownership. This result holds after conducting several endogeneity and robustness tests. We further find that the positive relation between state ownership and bank debt reliance is more pronounced in countries with high government ownership of banks, high corruption in bank lending, a left-oriented government, and a collectivist national culture, which provides additional support for the soft budget constraint view. Finally, in external validity tests we find that state ownership affects other aspects of debt structure such as debt maturity and debt security.

The debt collection industry is booming, in part due to collection efforts on debts for which the statute of limitations on collections has run. A trap for unsophisticated debtors, debt collectors often attempt to collect time-barred debts through offers to settle those debts for a fraction of what is owed. In response, debtors typically exercise one of four options. First, some debtors simply pay the offered settlement amount, usually 10-40% of the total outstanding debt, thereby satisfying the debt in full. Second, those who wish to eliminate the debt but cannot afford the entire settlement amount will instead make a small payment as an installment, unwittingly reviving the statute of limitations on collections and making the entire debt judicially enforceable for years to follow via the partial payment rule. Third, some debtors simply disregard the settlement offer. This, in turn, can result in the debtor being sued on the debt, where results will range from the debtor owing nothing (in the event the debtor defends and asserts the statute of limitations defense) to a judgment exceeding the full amount of the debt (in the event the debtor does not defend and the matter is resolved by default judgment). Finally, some debtors sue the collector for unlawful collection efforts, where results will vary depending on the precise wording of the settlement letter and whether such an offer is deemed unlawful in the jurisdiction at issue. When a debtor exercises either of the first two options, the result is a windfall to collectors, who might otherwise be unable collect on the debt due to the statute of limitations. When a debtor exercises either of the final two options, already-overburdened courts are swamped with difficult cases that are unnecessary and easily avoidable. To ease the burden on courts and create financial outcomes that are roughly the same for all time-barred debts, this article proposes the following solutions: First, because the debt itself is still valid, debt collectors may attempt to collect on time-barred debts outside of court, as most courts have held; however, when doing so, the collector must provide warnings that inform the debtor that the statute of limitations has run on the debt and that any payment will revive the statute of limitations as to its entire amount. Along with these warnings, the collector must promise that it will not sue to collect on the debt, which will reduce the number of inappropriate default judgments in such cases, and must permit the debtor to pay the proposed settlement amount in installments and entering a repayment plan for only that amount, which, when elected, will negate the partial payment rule and prevent collection of a greater amount than what has been offered. As an additional layer of protection against any suit seeking to collect an old debt, this article proposes amendments to the Fair Debt Collection Practices Act (“FDCPA”) that plainly state, on the one hand, that filing suit to collect on a time-barred debt violates the FDCPA, and, on the other hand, that it is not unlawful for a collector to seek repayment on a time-barred debt outside of court, as long as the notices and promises proposed above are included in the collector’s written settlement offer. As a final layer of protection, this article proposes legislative and judicial solutions to combat existing rules that deem the statute of limitations defense waived unless asserted. Under this proposal, the burden of proof would shift from the debtor-defendant to the plaintiff to affirmatively establish that the debt at issue is not time-barred, which the plaintiff must prove with evidence before a judgment, default or otherwise, may be awarded. In addition, this article proposes that courts screen all motions for default judgments in consumer debt suits and dismiss those cases where the plaintiff fails to prove the suit is timely. In combination, these proposals will resolve the present circuit split on the lawfulness of collection efforts on time-barred debts, result in recovery on such debts that is roughly the same across all similarly-situated debtors, and ensure that most collection activity on time-barred debts occurs outside the judicial process, alleviating courts of this burdensome litigation.

In this paper, we examine how the timeliness of loan loss recognition within the banking system affects borrowers’ debt structure. Using data from 55 countries, we find that more timely loan loss recognition reduces firms’ reliance on bank debt, consistent with firms relying less on bank debt due to more costly monitoring by banks. In addition, we find that this negative impact is more pronounced when there is stringer regulatory supervision of banks and among financially constrained and opaque firms. We further find that the negative impact is more pronounced in countries with more developed bond markets, consistent with such markets facilitating a switch from bank debt when banks impose more costly monitoring on firms.

Tax provisions favoring corporate debt over equity finance (“debt bias”) are widely recognized as a risk to financial stability. This paper explores whether and how thin-capitalization rules, which restrict interest deductibility beyond a certain amount, affect corporate debt ratios and mitigate corporate default risk. We find that rules targeted at related party borrowing (the majority of today's rules) have no significant impact on debt bias, as they do not affect third-party borrowing. These rules also have no effect on broader indicators of firm corporate distress. Rules applying to all debt, in contrast, turn out to be effective: the presence of such a rule reduces the debt-asset ratio in an average company by 5 percentage points; and they reduce the probability of a firm being in financial distress by 5 percent. Debt ratios are found to be more responsive to thin capitalization rules in industries characterized by a high share of tangible assets.

We provide an economic rationale for the expansion of private equity (PE) groups into the business of private debt investing. We argue and show empirically that combining PE with private debt provides dual benefits for the parent entity. On the one hand, in the primary loan market, the parent uses its debt management division as a source of cheap funding for the PE funds’ portfolio companies which boosts the funds’ equity returns. On the other hand, there is information spillover from the PE to the debt division, enabling the debt manager to profitably trade on this information in the secondary loan market. Our results suggest that PE firms with affiliated debt management arms benefit from competitive advantages relative to their single-market peers.

In this paper, we study the effect of political uncertainty on the choice of debt source. Specifically, we examine whether national elections, which aggravates information asymmetry leads to a high degree of reliance on bank debt. Our results show that firms substitute away from public debt toward bank debt during election years. This finding is robust to a battery of sensitivity tests. We also find that the positive relationship between national elections and bank debt ratio is more pronounced in opaque firms and financially constrained firms, respectively. Furthermore, we find that the positive association between national elections and the degree of reliance on bank debt is more profound in firms from countries with stronger (weaker) shareholder rights (labor protection and creditor rights). Finally, we document that firms tend to use more bank debt when elections are closely contested and in countries with stronger constraints on the government.

This short paper highlights that a functional analysis of insolvency and restructuring proceedings reveals that all such proceedings share one common effect: debt cancellation. In order to only cancel unsustainable debt, all insolvency and restructuring procedures have developed procedural mechanisms able to identify what fraction of a debt a debtor is still able to serve. While these insights seem to be common knowledge to macro-economists, they have received little attention in the legal discussion. This short paper explains these effects and suggests four fundamental conclusions for legislators as well as the academic discussion about the principles of insolvency and restructuring procedures.

British public life has always been riddled with taboos, and nowhere is this more true than in the realm of economics.