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We develop a credit-risk model to study the informational role of investment in an economy susceptible to large liquidity shocks. Firms' investment decisions carry information about their asset quality, thereby mitigating informational frictions when firms enter bankruptcy. An increase in aggregate investment can reduce the informational value of investment, depressing firms' recovery values. Therefore, policies boosting investment can decrease debt and firm values by reducing the informational value of investment. The presence of debt overhang may enhance firm value by making firms' investment decisions more informative. We present suggestive empirical evidence consistent with model predictions on the relation between firms' investments and recovery rates.

This study investigates the intricate relationship between external debt, debt service, and economic growth by using the panel data of 32 Asian Developing Economies (ADE) spanning 1995 to 2020. Employing a two-step system generalized method of moments (GMM) and a dynamic common correlated estimate (DCCE) model, the research explores key macroeconomic channels through which debt influences growth and rigorously tests for debt overhang and crowding-out effects. Findings reveal that public and private investment, total factor productivity, and national savings are pivotal channels transmitting the non-linear effect of external debt on economic growth. Notably, only private and public investment convey the non-linear effects of debt service to economic growth, while productivity and savings convey the linear effect. Evidence of debt overhang and crowding-out effects is identified in the sampled economies. The study suggests strategic measures for developing countries, emphasizing the productive use of accumulated debt, enhanced debt management, and timely project completion. Furthermore, it advocates for fostering economic growth through increased productivity, domestic savings, and private sector expansion to reduce dependence on foreign debt, facilitating both debt repayment and economic self-sufficiency. Plain language summary: This study explores the intricate links among external debt, debt service, and economic growth in 32 Asian Developing Economies from 1995 to 2020. Using advanced statistical methods like the two-step system generalized method of moments (GMM) and a dynamic common correlated estimate (DCCE) model, the research investigates various macroeconomic pathways, specifically testing for non-linear effects such as debt overhang and crowding-out. Key findings emphasize the significance of public and private investment, total factor productivity, and national savings as pivotal channels for the non-linear impact of external debt on economic growth. Notably, the study reveals that private and public investment exhibit non-linear effects in response to debt service, while productivity and savings show linear effects. The research recommends strategic approaches for developing countries, focusing on judicious debt management, timely project completion, and initiatives to boost productivity, domestic savings, and private sector growth, thereby reducing reliance on foreign debt. Acknowledging valuable insights, the study recognizes limitations in the available data from 32 countries and emphasizes the need for further investigation into mediating and moderating variables in the relationship between external debt and economic growth. Particularly in the context of foreign debt financing policies, the study underscores the importance of exploring threshold values for negative impacts on transmission channels, suggesting avenues for future research to provide a more nuanced understanding of the dynamics involved. In essence, the study offers valuable insights into the nuanced relationship between external debt and economic growth, along with strategic recommendations for sustainable development in developing economies. [ABSTRACT FROM AUTHOR]

Purpose: This study investigates the association between debt overhang and carbon emissions (both direct and indirect emissions) using a sample of US publicly listed firms. Design/methodology/approach: The study applies generalized least squares (GLS) regression analyses to a sample of 2,043 US firm-year observations over a period of 14 years from 2007 to 2020. The methods include contemporaneous effect, lagged effect, alternative measures of carbon emissions and debt overhang, intensive versus non-intensive analysis, channel analysis, firm fixed effects, change analysis, controlling for credit rating analysis, propensity score matching approach, instrumental variable analysis with industry and year fixed effect. Findings: This study's findings reveal that the debt overhang problem increases carbon emissions. This finding holds when the authors use alternative measures of carbon emissions and debt overhang. The authors find that carbon abatement investment is a channel that is negatively impacted by debt overhang, which in turn increases carbon emissions. This study's results are robust for several endogeneity tests, including firm fixed effects, change analysis, propensity score matching approach and two-stage least squares (2SLS) instrumental variable analysis. Practical implications: The outcome of this research has policy implications for several stakeholders, including investors, firms, market participants and regulators. This study's findings offer insights for investors and firms, helping them allocate resources effectively and make financing decisions aimed at reducing carbon emissions. Regulators and policymakers can also use the findings to formulate policies that promote alternative sustainable finance practices. Originality/value: The outcome of this research is likely to help firms develop their understanding of the debt overhang problem and undertake strategies that yield a significant amount of funding to invest in reducing carbon emissions. [ABSTRACT FROM AUTHOR]

We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time , reflecting the value of call features to issuers and investors. This "value of callability" as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets. [ABSTRACT FROM AUTHOR]

ABSTRACTThis paper examines the relationship between corporate debt and firm productivity. We add to the existing literature by investigating the contingency effect of institutional quality in the corporate debt-productivity nexus. Using data for 2,084 Chinese listed firms, we find that corporate debt and political institutional quality have significant and negative impacts on productivity while legal institutional quality is significantly and positively associated with productivity. Also, our results reveal that both financial and fintech-supporting institutional factors exert negative contingency effects in the corporate debt-productivity relationship. Our findings provide a reasonable guideline for emerging market countries aiming to address the corporate debt overhang problem or seeking factors to boost firm productivity growth.

This paper argues that the Covid recession, and aggressive monetary tightening in the US accompanying the post-Covid recovery, are likely to cause a sovereign debt overhang in emerging market economies—i.e. debt which is unlikely to be fully repaid. A sovereign debt reconstruction mechanism (SDRM) seems necessary to avoid widespread disorderly debt write-downs. We discuss a range of procedures that are available, building upon Anne Krueger's proposal for an SDRM in 2002 (Krueger, 2002 a , b). At that time Krugman (1988) had already argued that any SDRM should incentivize debtors so that they put in effort to clear their debts (a Krugman contract). Menzies (2004) went further than this to show that these effects should be further sharpened, creating what he called 'hyper-incentive effects' (a Menzies contract). The International Monetary Fund has argued that risk-sharing between debtors and creditors will also be important (IMF, 2020). But we show that risk-sharing will—in general—pull in the opposite direction to incentive effects, and we doubt the extent to which the IMF has recognized this trade-off. Finally, we argue that collective action clauses (CACs) increase the probability of achieving any agreement, whatever it might be. They will help avoid the alternative of disorderly debt write-downs, outcomes which will deliver neither incentive effects nor risk-sharing. [ABSTRACT FROM AUTHOR]

This paper explores the relationship between debt and growth in the 28 EU member states over the 1995-2014 period using an interacted panel data estimator in standard augmented Solow growth regression. The nonlinear nature of the debt-growth relationship allows for computation of the optimal turning point given the set of four conditioning variables. Additionally, the heterogeneity in EU members’ growth rates is explored by a panel data quantile regression estimator with nonadditive fixed effects. The results suggest that while additional government consumption decreases the level of growth-maximizing debt, the level of private debt has a positive impact on the optimal turning point. On average, estimated optimal debt thresholds are located in the vicinity of the policy-set 60% debt-to-GDP ratio; however, the observed high heterogeneity in the underlying data results in wide confidence intervals.

The purpose of this study is to present possible scenarios for assessing the levels of Ukraine’s sovereign debt burden in the context of the cumulative effect of Ukraine’s pre-war and post-war debt accumulation to avoid sovereign debt overload or even sovereign default and achieve debt relief. The methodology of the article is based on the theory of international finance using the scientific method of system dynamics as an applied method of analysis. The main purpose of the article was to find the way out of the concession debt trap, but the Russian military aggression against Ukraine in February 2022 significantly changed the purpose of the analysis. As a result, as far as possible, an element of military economics was added to the article. The dynamic interpretation of the research problem is formulated as: “What are the possible dynamics of falling into a sovereign debt trap and, ultimately, into political dependence through external infrastructure financing before and after the war, and how can such a trap be avoided?” It is necessary to recognize such a trap in advance, because, fortunately, Ukraine has not yet fully got there. The results of the study are important in the application of the national debt policy model.

In the literature of the labor market, Shimer's criticism of the standard search and matching models is that the elasticity of the labor market is low compared to the technology shock. As a result, the standard search and matching model is not able to explain the fluctuations observed in the main variables of the labor market, such as unemployment and job vacancies. In other words, in the standard model of search and matching with Nash bargaining, the fraction of fundamental surplus is large. Various solutions have been proposed to increase the elasticity of labor market compression to changes in productivity, and all of these solutions increase unemployment's response to changes in productivity by reducing the basic surplus deficit. Therefore, in the current research, by introducing the problem of debt pressure in the production and financial (intermediation) sector, originating from the current or expected monetary regime (policy) in the search and adaptation model, we wanted to follow up and analyze this important issue, how to introduce this Friction can explain high fluctuations in unemployment and vacant job opportunities by reducing the fundamental surplus and fueling the tension of the labor market, and in this way, it can provide a new solution to the Shimmer puzzle. In order to consider the basic idea of this research, a model including the key components in the search and matching model was developed in an analytical space of dynamic stochastic general equilibrium including basic surplus deduction. The proposed integrated model can be considered as a theoretical framework for investigating the implications of including long-term risky nominal debt and the problem of the threat of debt pressure for deducting the fundamental surplus in the structure involving financial frictions and the main features of the search and adaptation model subject to firm-specific productivity shocks and inflation. According to the assumptions of Iran's economy, the model was simulated in two states of flexibility and stickiness of prices, and the results show that: a monetary regime that leads to inflation by reducing the real value of companies' debts, causes the problem of the threat of debt pressure. As leverage and default rates increase, firms forego new investments and this leads to reduced labor force recruitment, reduced job openings, and increased unemployment. Therefore, the existence of the problem of the threat of debt pressure in companies reduces the deficit of the fundamental surplus and thus aggravates the impact of shocks on the elasticity of the labor market. [ABSTRACT FROM AUTHOR]

Despite the notion that economies with abundant natural resource revenues should have a lower default risk and thus a lower share of public debt, this notion is not generally valid. Natural resources in these countries serve as a guarantee to procure more public loans and binds them in debt trap. In this regard, this article examines the short-term and long-term effects of natural resource rent on public debt in developing countries during 2000-2020. For this purpose, first, a model was designed with the presence of basic variables affecting public debt, along with the variable of share of natural resource rent from GDP, and using panel co-integration tests, the existence of a long-term equilibrium relationship between the variables of the model was confirmed. Finally, the pooled mean group (PMG) approach was used to measure long-term and short-term relationships, and the e Dumitrescu-Hurlin test was used to determine causality. The findings of this research show that the effect of the share of natural resource rent from GDP on public debt is negative (and significant) in the short term and positive (and significant) in the long term. The results of the Dumitrescu-Hurlin test also indicate the existence of a two-way causal relationship between the abundance of natural resources and public debt. Based on this, it can be said that the abundance of natural resources in developing countries leads to higher public debts in the long term, and high levels of public debts also cause rapid extraction of natural resources in these countries. [ABSTRACT FROM AUTHOR]

This study sought to test the impact of China's infrastructure investment on economic growth in selected African states. Many comparative studies have shown the positive role that infrastructural loans plays in supporting economic growth. However, for Africa, the role of China's infrastructure projects has mixed views with regards to its contribution to growth and development. A survey of the literature showed that the central question about Chinese infrastructural loans is whether the infrastructural projects are beneficial or detrimental to Africa. Currently, there is no settled opinion as to whether (or not) Africa is benefiting from the Chinese economic relations. This study was quantitative, and we used panel data to achieve our objectives. The study employed annual panel data for 15 African countries covering the period of 2000–2017. The Pooled Mean Group, Mean Group, Fully Modified Ordinary Least Squares, and Dynamic Ordinary Least Squares panel techniques were used for estimation purposes. The main conclusion from the quantitative analysis of China's infrastructural loans in Africa is that China's efforts in developing infrastructure are translating into economic growth. This study provides evidence that China's engagement in Africa could be beneficial, given the positive relationship between loans and economic growth. [ABSTRACT FROM AUTHOR]

Using a dataset on Chinese listed firms, we study the impact of short debt maturity on capital expenditures. In contrast to the empirical findings from most of the previous works that rely on the US firm-level datasets, our results show that firms invest less rather than invest more when they have relatively shorter debt maturity. We argue that in an economy where short-term bank loans are the major financing resource, such as that of China, firms with shorter debt maturity tend to suffer more from potential rollover risks and hence are more likely to reduce their near future capital expenditures. Such an overhang effect generated by short-term debt becomes stronger when firms present worse financial health, as rollover risks are likely to be more serious when firms' assets-in-place deteriorate. [ABSTRACT FROM AUTHOR]

External debt is essential for economic growth; however, high levels of public debt adversely affect growth via debt overhang, crowding-out of domestic private investment, and constraining countercyclical fiscal policy. This paper estimates the causal relationship between external public debt and economic growth in India, along with other macroeconomic variables, using annual time series data for 41 years, from 1980 to 2020, and applying the error correction mechanism estimation method. The debt burden is segmented into two parts - external debt stock and external debt service - and are measured as the percentage share to external debt to GDP and percentage share of total external debt service to total foreign exchange earnings, respectively. The estimated results show a significant positive impact of external debt stock on economic growth in the long run. There is no evidence of a debt overhang problem, but evidence of external debt service potentially affects growth by crowding out private investment. The effect of debt stock is less noteworthy, as the negative effect of debt service exceeds the positive debt stock effect. The adverse effect of debt service, both in the long and short run, is significant. The short-run disequilibrium is corrected at a reasonably good speed, providing the sanguinity of the external public debt in India. [ABSTRACT FROM AUTHOR]

• Greater greenwashing increases the size of bank loans but aggravates debt overhang. • The dual effects of greenwashing are more prevalent in non-polluting firms, large firms, and profitable enterprises. • The dual effects of greenwashing can be mitigated by administrative litigation, media coverage, and competition. We discuss the dual impacts of corporate greenwashing on access to financing. Using data from China's listed firms from 2007 to 2022 and an insightful measurement of greenwashing that uses a machine learning approach, we find that greater greenwashing increases the size of bank loans, the most important financing tool in China. However, we confirm that the effect of greenwashing on promoting financing is inefficient, as it aggravates debt overhang. The results show that media coverage, administrative litigation, and industrial and regional competition can mitigate the effect of greenwashing on financing. Our findings have policy implications for corporate sustainability. [ABSTRACT FROM AUTHOR]

The global economy is in the midst of an unprecedented slump caused by the coronavirus pandemic. This systemic risk like no other at a time of record-breaking debt levels, especially among non-financial firms across the world, could exacerbate corporate vulnerabilities, deepen macro-financial instability, and cause long-lasting damage to economic potential. Using data on more than 3.7 million non-financial firms from 58 countries during the period 1997–2019, we develop a two-pronged approach to investigate the relationship between corporate leverage and fixed investment spending. The empirical analysis, robust to a battery of sensitivity checks, confirm corporate leverage is highly vulnerable to disruptions in profitability and cash flow at the firm level and economic growth at the aggregate level. These findings imply that corporate debt overhang could become a strenuous burden on non-financial firms, especially if the COVID-19 pandemic lingers and global downturn becomes protracted. [ABSTRACT FROM AUTHOR]

In this paper, I theoretically examine the ability of contingent convertible bonds (CoCos), a source of bank capital under Basel III, to reduce the bank's default risk. Although issuing CoCos adds a buffer to the bank's balance sheet, it may induce wrong incentives in the form of debt overhang and risk shifting. My results indicate that the most popular type of CoCos, temporary write‐down (TWD), is least effective at mitigating default risk. Unlike other types of CoCos, TWDs continue affecting shareholders' incentives even after the trigger event, thereby inducing an earlier endogenous default. [ABSTRACT FROM AUTHOR]

We analyze the impact of credit default swaps (CDSs) trading on firm investment, long-term debt financing, and valuation. In our model, the firm is endowed with a real option to initiate a project and enhance its future growth. Its creditors have access to CDS contracts that hedge them against default losses. We show that CDS protection increases the firm's pledgable income: that is, the maximum amount of debt it can raise. However, at the same time CDS protection decreases asset growth and impedes project initiation. As a result, CDS trading could reduce firm value, and the negative effects are stronger when the firm is riskier, where shareholders have stronger bargaining power, and growth opportunities are less valuable. Using simulated cross-sections of firms, we find that CDS trading increases corporate default rates and deters investment. Altogether, CDS firms tend to have a lower firm value and more volatile equity returns than non-CDS firms. This paper was accepted by Gustavo Manso, finance. [ABSTRACT FROM AUTHOR]

This paper overviews different exit strategies for the U.S. from the debt-overhang, and analyses their implications for emerging markets and global stability. These strategies are discussed in the context of the debates about secular-stagnation versus debt-overhang, the fiscal theory of the price level, the size of fiscal multipliers, prospects for a multipolar currency system, and historical case studies. We conclude that the reallocation of U.S. fiscal efforts towards infrastructure investment aiming at boosting growth, followed by a gradual tax increase, aiming at reaching a modest primary fiscal surplus over time are akin to an upfront investment in greater long-term global stability. Such a trajectory may solidify the viability and credibility of the U.S. dollar as a global anchor, thereby stabilizing Emerging Markets economies and global growth.

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We investigate the effect of total, public, and private external debt stocks on the growth rate and also on total, government, and private investment by using data for a large sample of developing countries. We find a significant and negative growth effect of total external debt stock, lending evidence for the debt overhang argument. Moreover, our results importantly indicate that external debt lowers growth only in countries with ethnically fractionalized and ineffective governments. Furthermore, our empirical findings don't support the existence of a non-linear or threshold relationship between external debt and growth. Similar to the growth effects of external debt, the significantly and negatively estimated coefficients on the three measures of external debt stocks imply that external debt reduces investment, again providing a robust evidence for the debt overhang argument. Finally, our estimations show that private investment level is more sensitive to the government external debt than the private external debt. [ABSTRACT FROM AUTHOR]

This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by applying an instrumental variable approach (GMM). Our results support the debt overhang hypothesis and indicate that this relationship only works through the public debt channel. In our baseline regression, a 10 percentage point increase in public debt reduced private investment by €18.32 billion, given the levels of private investment prevalent in 2016. By contrast, private debt does not appear to be a significant determinant of private investment. These results hold after controlling for a number of factors that might have caused public debt to increase and private investment to decrease. While our analysis focuses on the financial sector channel, we find no evidence that public debt tightens the credit constraints for private firms or worsens the public debt overhang. We also show that government bailouts of the financial sector, which could alleviate financial distress and boost credit provision, do not appear to be effective in mitigating the public debt overhang effect. Finally, we find evidence that the financial openness of a country does alleviate the negative impact of public debt on private investment. This might suggest that attracting foreign capital compensates for a contraction in the domestic pool of financial resources due to higher public debt levels. [ABSTRACT FROM AUTHOR]

The existence of the phenomenon of twin's deficits in South Asian countries has now become a common characteristic from the last few decades. Their reliance on debt both external and domestic to bridge thesedeficits has been increasing continuously which results in mounting public debt burden. The positive effect of public debt burden in resource-scarce countries occurs if the debt is utilized optimally and properly in income-generating activities that enhance the productive capacity of the borrower country to repay the debt obligations and its servicing charges. The negative effect of debt works through two main channels, namely "debt overhang" and "crowding out". The present study aims to investigate the implication of debt overhang and liquidity constraints hypothesis in South Asian countries i.e.Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. For this purpose, a hybrid model has been developed and panel data of these countries from 1990 to 2020 has been used. The study uses standard panel data estimation techniques for the estimation of the results. The results obtained confirm the existence of debt overhang and liquidity constraints hypothesis in South Asian economies. Similarly, domestic debt also offsets economic growth and investment. The study suggests that bridging the twin's deficits through public borrowings is not a safe option and efforts will be made to minimize the expenditures and increase the revenues by adopting better strategies. [ABSTRACT FROM AUTHOR]

The existence of the phenomenon of twin's deficits in South Asian countries has now become a common characteristic from the last few decades. Their reliance on debt both external and domestic to bridge thesedeficits has been increasing continuously which results in mounting public debt burden. The positive effect of public debt burden in resource-scarce countries occurs if the debt is utilized optimally and properly in income-generating activities that enhance the productive capacity of the borrower country to repay the debt obligations and its servicing charges. The negative effect of debt works through two main channels, namely "debt overhang" and "crowding out". The present study aims to investigate the implication of debt overhang and liquidity constraints hypothesis in South Asian countries i.e.Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. For this purpose, a hybrid model has been developed and panel data of these countries from 1990 to 2020 has been used. The study uses standard panel data estimation techniques for the estimation of the results. The results obtained confirm the existence of debt overhang and liquidity constraints hypothesis in South Asian economies. Similarly, domestic debt also offsets economic growth and investment. The study suggests that bridging the twin's deficits through public borrowings is not a safe option and efforts will be made to minimize the expenditures and increase the revenues by adopting better strategies. [ABSTRACT FROM AUTHOR]

This study sought to test the impact of China’s infrastructure investment on economic growth in selected African states. Many comparative studies have shown the positive role that infrastructural loans plays in supporting economic growth. However, for Africa, the role of China’s infrastructure projects has mixed views with regards to its contribution to growth and development. A survey of the literature showed that the central question about Chinese infrastructural loans is whether the infrastructural projects are beneficial or detrimental to Africa. Currently, there is no settled opinion as to whether (or not) Africa is benefiting from the Chinese economic relations. This study was quantitative, and we used panel data to achieve our objectives. The study employed annual panel data for 15 African countries covering the period of 2000–2017. The Pooled Mean Group, Mean Group, Fully Modified Ordinary Least Squares, and Dynamic Ordinary Least Squares panel techniques were used for estimation purposes. The main conclusion from the quantitative analysis of China’s infrastructural loans in Africa is that China’s efforts in developing infrastructure are translating into economic growth. This study provides evidence that China’s engagement in Africa could be beneficial, given the positive relationship between loans and economic growth.

This study investigated the effect of government debt on Nigeria’s economic growth using annual data from 1980 to 2018 and the Autoregressive Distributed Lag technique. The empirical results showed that external debt constituted an impediment to long-term growth while its short-term effect was growth-enhancing. Domestic debt had a significant positive impact on long-term growth while its short-term effect was negative. In the long term and short term, debt service payments led to growth retardation confirming debt overhang effect. The findings suggested that the government should direct the borrowed funds to the diversification of the productive base of the economy. This will improve long-term economic growth, expand the revenue base and strengthen the capacity to repay outstanding debts when due. Fiscal improvements that encourage domestic resource mobilization, efficient debt management strategies and reliance on domestic debt rather than external debt for increased deficit financing to engender greater growth are the main contribution of the study.

This study investigated the effect of government debt on Nigeria's economic growth using annual data from 1980 to 2018 and the Autoregressive Distributed Lag technique. The empirical results showed that external debt constituted an impediment to long-term growth while its short-term effect was growth-enhancing. Domestic debt had a significant positive impact on long-term growth while its short-term effect was negative. In the long term and short term, debt service payments led to growth retardation confirming debt overhang effect. The findings suggested that the government should direct the borrowed funds to the diversification of the productive base of the economy. This will improve long-term economic growth, expand the revenue base and strengthen the capacity to repay outstanding debts when due. Fiscal improvements that encourage domestic resource mobilization, efficient debt management strategies and reliance on domestic debt rather than external debt for increased deficit financing to engender greater growth are the main contribution of the study. [ABSTRACT FROM AUTHOR]

This paper overviews different exit strategies for the U.S. from the debt-overhang, and analyses their implications for emerging markets and global stability. These strategies are discussed in the context of the debates about secular-stagnation versus debt-overhang, the fiscal theory of the price level, the size of fiscal multipliers, prospects for a multipolar currency system, and historical case studies. We conclude that the reallocation of U.S. fiscal efforts towards infrastructure investment aiming at boosting growth, followed by a gradual tax increase, aiming at reaching a modest primary fiscal surplus over time are akin to an upfront investment in greater long-term global stability. Such a trajectory may solidify the viability and credibility of the U.S. dollar as a global anchor, thereby stabilizing Emerging Markets economies and global growth. [ABSTRACT FROM AUTHOR]

We build a model of debt for firms with investment projects, for which flexibility and free cash flow problems are important issues. We focus on the factors that lead the firm to select the zero-debt policy. Our model provides an explanation of the so-called "zero-leverage puzzle". It also helps to explain why zero-debt firms often pay higher dividends when compared to other firms. In addition, the model generates new empirical predictions that have not yet been tested. For example, it predicts that firms with zero-debt policy should be influenced by free cash flow considerations more than by bankruptcy cost considerations. Additionally, the choice of zero-debt policy can be used by high-quality firms to signal their quality. This is in contrast to most traditional signalling literature where debt serves as a signal of quality. The model can explain why the probability of selecting the zero-debt policy is positively correlated with profitability and investment size and negatively correlated with the tax rate. It also predicts that firms that are farther away from their target capital structures are less likely to select the zero-debt policy when compared to firms that are close to their target levels. [ABSTRACT FROM AUTHOR]

This paper research the relationship between external debt and economic growth. Using the debt Laffer curve theory, the authors determine the maximum debt level of the Southeast Asian countries. Secondary data period 2006–2014 of 10 countries of the Association of Southeast Asian Nations are collected from the Asian Development Bank and the International Monetary Fund website. The authors use the method of regression for balanced panel data with a fixed effect model. The research results indicate that there exists a nonlinear relationship between external debt and economic growth in the Southeast Asian countries, including five variables: budget balance to gross domestic product, the lag of gross domestic product growth, the ratio of total investment to gross domestic product, the ratio of external debt to gross domestic product and the ratio of debt payments on exports of goods and services. These five variables are significant statistics and explain the meaning 24.87 % of the model. The other two: trade openness and trade index are not statistically significant. On the other hand, the research results have found the maximum debt level of the Southeast Asian countries, which is 70.42 %. Based on the study results, the authors suggest some recommendations to help the government of the Southeast Asian countries to build up the maximum debt levels, in line with the socio-economic development goals of their countries in each period.

Purpose – The purpose of this paper is to estimate benefits to debt reduction by using the natural experiment provided by the debt relief programs: the Heavily Indebted Poor Countries Initiative launched by the International Monetary Fund and World Bank in 1996 and the Multilateral Debt Relief Initiative extension in 2005. Design/methodology/approach – The authors apply a time-shifted difference-in-differences strategy to evaluate the effects of this intervention. The date of each country’s decision to participate in the program is used as one treatment point while the date of the completion of the debt relief program is used as another treatment point. The exercise compares different economic outcomes such as domestic and foreign investment, schooling, and employment of the treated observations to the counterfactual of untreated country-years. The period between the decision and completion points is a short run while the period after the completion point is considered a long run. Findings – The authors found that debt relief increased capital investment as much as 1.63 percent in the short run and 5.79 percent in the long run. However, there was no effect on foreign direct investment suggesting that debt overhang does not affect incentives of foreign investors. Output and schooling enrollment increased both in the short and long run. Originality/value – This paper exploits a natural experiment of debt relief in a number of developing countries to shed light on the possible benefits to debt reduction. The authors are able to separate the short- and long-run effects of debt reduction. The finding that domestic but not foreign investment responds to debt reduction is suggestive of the differences in incentives across these two sources of investment.

We examine the effects of the global financial crisis of 2008 and the European debt crisis of 2011 on the relationship between capital structure, investments, and performance for Eastern European companies. While the existing literature documents how firms' investments are sensitive to the availability of internal funds and to debt holdings, we further investigate whether this investment sensitivity also translates in different levels of performance, and document that capital structure indeed has both a direct and an indirect effect, mediated by the capital expenditure channel. We show that firms with higher financial flexibility experience higher investments and returns on capital. Over-levered firms instead suffer from a debt overhang condition, forcing them to curb investments, and consequently experiencing lower performance. Overall, we provide evidence on the importance of capital structure and financial flexibility on investments and performance, showing the real consequences of the debt overhang condition on firm value creation. Firms should therefore aim at maintaining adequate financial flexibility in order to be able to pursue future profitable investment opportunities, and avoid the under-investment problem arising from a debt overhang situation. [ABSTRACT FROM AUTHOR]

Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firm's overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure. [ABSTRACT FROM AUTHOR]

This study aims to investigate the impact of external debt and debt servicing on the public investment in Pakistan for a period of 1976 to 2018. ARDL bound testing approach, ECM, and appropriate data diagnostic tests are utilized to analyze the neo-classical investment demand function. The estimates of external debt and debt service payment confirm the existence of debt overhang and debt crowding out effects in the long. Growth in debt burden indicates that Pakistan has been slipped into the debt trap. Therefore, policy makers should work for curtailing the debt burden as it binds the economy in vicious circle of borrowing. Enhancing the exports revenue, accelerating the economic productivity, and boosting the inflow of foreign direct investment are the channels for combating with the crisis of external debt. [ABSTRACT FROM AUTHOR]

In this study, we investigate whether debt overhang may contribute to explaining the declining growth rate of investment in China. By using firm-level data, we find a nonlinear firm debt–investment relationship and derive thresholds beyond which debt has a negative and significant impact on investment, which supports the theory of debt overhang. [ABSTRACT FROM AUTHOR]