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"DEBT CAPITAL"
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Managing debt
\"Managing Debt takes a look at the differences between good and bad debt, discusses how to build a good credit score, and explains how to pay down debt\"-- Provided by publisher.
Book
DETERMINANTS OF INTEREST RATES ON CORPORATE DEBT
The objective of this article is theoretical and methodological justifying of determining algorithm of the cost of debt capital for enterprises functioning in emerging markets (EM). The methods of research: analysis and synthesis, system analysis, comparative analysis, empirical and statistical methods, factor analysis. Results. In this article key determinants of interest rates on debt capital for enterprises and their impact on the procedure of discount rate calculation are determined. The issue of the cost of debt calculation of enterprises in condition of absence of complete information concerning systematic and non-systematic crediting risks is studied. Differences between interest rate on the loan fixed in credit agreement and expected by creditors the cost of debt are identified. It is determined that the key factor impacting the deviation level of market value of debt capital from the nominal, and respectively, deviation of the cost of debt from the cost of capital is probability of default (PD). At the minimum values of PD, the contract interest rate corresponds to the rate of cost of debt and it is advisable to use it for discount rate calculation. Critical analysis of alternative methodological approaches of the cost of debt calculation is made. Ways of integrating of market information concerning credit default swaps into the process of expected cost of debt calculation are justified. Factors of shadowing of rates of the cost of debt and ways of reducing of shadow transactions’ level in the credit market are identified. Conclusions. At high PD values, expected by market premium for default risk may exceed the contract interest rate, which necessitates constant monitoring of credit risks and appropriate adaptation of interest rates. In the paper the algorithm of such adaptation are proposed. It is shown that in the case of non-use of interest rates adjustment taking into account changes in PD, CDS and LGD, premium for creditors’ systematic risk can differ significantly from market values of similar enterprises (peer-group), and estimated value of the cost of debt can acquire negative values. Contract (promised) interest rate should be set in such way that the premium for systematic risk of providing debt capital will be at the level of similar companies and does not change significantly as a result of probability of default changes. If in practice the opposite situation occurs, it is the evidence of contract interest rate shadowing, absence of effective system of assessment and management of credit risks. For solving the problem of interest rate transparency and filling of information gaps concerning PD borrowers in EM countries, should intensify CDS market. Keywords: debt capital, default probability, non-performing loans, credit default swap, credit spread, debt capital premium, shadow economy. JEL Classification E47 Formulas: 16; fig.: 0; tabl.: 3; bibl.: 15.
Journal Article
Managerial Ability and Credit Risk Assessment
Research on the credit rating process has primarily focused on how rating agencies incorporate firm characteristics into their rating opinions. We contribute to this literature by examining the impact of managerial ability on the credit rating process. Given debt market participants’ interest in assessing default risk, we begin by documenting that higher managerial ability is associated with lower variability in future earnings and stock returns. We then show that higher managerial ability is associated with higher credit ratings (i.e., lower assessments of credit risk). To provide more direct identification of the impact of managerial ability, we examine chief executive officer (CEO) replacements and document that ratings increase (decrease) when CEOs are replaced with more (less) able CEOs. Finally, we show that managerial ability also has capital market implications by documenting that managerial ability is associated with bond offering credit spreads. Collectively, our evidence suggests that managerial ability is an important factor that bond market participants impound into their assessments of firm credit risk.
This paper was accepted by Mary Barth, accounting
.
Journal Article
The impact of narrative disclosure readability on bond ratings and the cost of debt
Prior research on the determinants of credit ratings has focused on rating agencies’ use of quantitative accounting information, but the there is scant evidence on the impact of textual attributes. This study examines the impact of financial disclosure narrative on bond market outcomes. We find that less readable financial disclosures are associated with less favorable ratings, greater bond rating agency disagreement, and a higher cost of debt. We improve causal identification by exploiting the 1998 Plain English Mandate, which required a subset of firms to exogenously improve the readability of their filings. Using a difference-in-differences design, we find that the firms required to improve the readability of their filings experience more favorable ratings, lower bond rating disagreement, and lower cost of debt. Collectively, our evidence suggests that textual financial disclosure attributes appear to not only influence bond market intermediaries’ opinions but also firms’ cost of debt.
Journal Article
Female directors and the cost of debt: does gender diversity in the boardroom matter to lenders?
Purpose
This paper aims to investigate the question concerning whether gender diversity in the boardroom matters to lenders or not?
Design/methodology/approach
To answer this question, the authors use the data from 2009 to 2015 of all A-share listed companies on the Shanghai and Shenzhen stock exchanges. The authors use ordinary least squares regression and firm fixed effect regression to draw our inferences. To check and control the issue of endogeneity the authors use one-year lagged gender diversity regression, two-stage least squares regression, propensity score matching method and Heckman two-stage regression.
Findings
The results suggest that the presence of female directors on the board reduces managerial opportunistic behavior and information asymmetry and, consequently, creditors’ perceptions about the probability of loan default and the cost of debt. The authors find that lenders charge 4 per cent less from borrowers that have at least one female board member than they do from borrowers with no female board members. The authors also find that the board structure (i.e. gender diversity) of government-owned firms also matters to lenders, as government-owned firms that have gender-diverse boards have a lower cost of debt (i.e. 5 per cent lower interest rate).
Practical Implications
The findings have implications for individual borrowers and for regulators. For example, borrowers can get debt financing at lower rates by altering their boards’ composition (i.e. through gender diversity). From the regulatory perspective, the results support recent legislative initiatives around the world regarding female directors’ representation on boards.
Originality Value
This paper makes several contributions. First, beyond the recent studies on boardroom gender, the authors investigate the relationship between gender diversity in the boardroom and the cost of debt. Second, the authors extend the literature on the association between government ownership and cost of debt by first time providing evidence that the board composition (e.g. gender diversity) of government-owned firms also matters to the lenders. The other contributions are discussed in the introduction section.
Journal Article
Unravelling the Missing Link: Climate Risk, ESG Performance and Debt Capital Cost in China
The concept of sustainability has developed significantly from an unrealistic abstract ideology to a framework that can measure companies’ environment, society and corporate governance (ESG) performance. While extensive research has established some relational impacts of ESG performance on debt capital cost (DCC), this paper contends that a comprehensive review of these impacts is incomplete without screening them through the lens of climate risk (CR). Companies are subjected to CR that comprises physical and transition factors resulting from climate change. This paper aims to unravel the missing link between CR and ESG performance, and the consequent impacts on DCC. This paper illustrates using Chinese companies that operate in an emerging economy with robust industrial activities under intense global scrutiny to achieve emission reduction and meet carbon neutrality goals. Through considering CR, the impacts of ESG performance on DCC are explained using panel data and mediation effect tests with A-share listed enterprises on the Shanghai and Shenzhen stock exchanges from 2016 to 2020. The findings show that ESG performance significantly and negatively affects DCC, with debt default risk playing a mediating role. The negative effect of ESG performance on DCC is more significant in non-polluting enterprises and non-state-owned enterprises.
Journal Article
Demystifying the influence of debt providers’ preferences on sustainability reporting: a firm-level meta-analytical inquiry
Over the past three decades, a plethora of academic research has examined the impact of debt capital providers, proxied by leverage, on firms’ sustainability reporting (SR) practices, indicating its relevance as a major determinant. Since the empirical literature remains inconclusive, we carried out the first comprehensive firm-level meta-analysis to reconcile the conflicting results from 112 studies involving 180 effect sizes across 32,953 firms spanning from 1989 to 2022. This provides a timely and up-to-date evaluation of the magnitude and nature of the engagement and influence of this significant stakeholder group on SR. Further, the study provides granular insights by dividing the overall effect on SR into three reporting dimensions—adoption, extent, and quality of reporting—to understand the impact of leverage on each and detail plausible reasons cited in the literature underpinning the positive or negative impact of debt providers on SR. The results show a positive significant impact of debt capital providers on SR, specifically, the adoption and extent of SR, but insignificant influence on SR quality, consistent with the findings of legitimacy theory. Debt capital providers’ sustainability information needs remain limited to the “act” and “extent” of disclosure and concern for SR has not percolated to “ask for quality,” indicative of a rather surface-level care for SR practices of firms. Regarding the strength of this stakeholder group and its funding power, greater activism, advocacy, and informational sensitivity are required to encourage firms to engage in meaningful SR practices. Subgroup analysis and meta-regression techniques were used to account for potential conceptual and study-based moderators. Significant discrepancies were observed due to differences in content of reported issues, type of firm, leverage proxies, the sample period, and publication quality. The study emphasizes the need for proactive measures among debt capital providers to counteract the limited positive impact of leverage on sustainability reporting. By identifying research gaps and exploring implications for debt providers and companies, this study highlights how ESG-sensitive lenders can potentially steer firms towards quality SR practices. It offers valuable insights that could inform policy changes, foster collaboration, and advance the practice of sustainability-oriented lending.
Journal Article
Regulation intensity, environmental disclosure, and cost of capital: evidence from listed firms in China
While theoretical deductions propose that environmental disclosure helps reduce cost of capitals, this conclusion is not always supported in empirical investigations and many factors moderate this connection. In this paper, we re-examine the issue against a unique background, say in the new development stage of China that pursues a balance between economic growth and environmental protection. Specifically, we build an environmental disclosure index and relate it with the costs of equity and debt capitals. We find the disclosure does not significantly contribute to the variation in either cost, when the relationship is estimated in pooled samples. However, when regulation intensity is involved, the puzzle is resolve. In the debt market, we find institutional investors generally devalues environmental disclosure but appreciate disclosure by essentially polluting firms. In contrast, retail investors in the stock market generally respond to environment disclosure in a positive way, but the disclosure by traditionally recognized polluting firms leads to increase in the cost of equity capital. Our work features important heterogeneity between debt and equity markets, and also the role of regulation intensity in moderating the connection.
Journal Article
Mandatory CSR Disclosure, CSR Assurance, and the Cost of Debt Capital: Evidence from Taiwan
This study examined the impact of mandatory corporate social responsibility (CSR) disclosure, CSR assurance and the reputation of assurance providers (accounting firms) on the cost of debt capital. Our difference-in-difference research design in conjunction with univariate and multiple regression analysis was assessed using a large sample of firms listed on the Taiwan Stock Exchange and the Taipei Exchange. Our empirical results revealed that mandatory CSR assurance on CSR disclosure provided by accounting firms tended to reduce the cost of debt capital. However, contrary to expectations, the reputation of the accounting firm (Big 4 accounting firms vs. non-Big 4 accounting firms) tasked with providing CSR assurance did not have a significant effect on the cost of debt capital. These results have implications for firms seeking an assurance provider as well as for Big 4 accounting firms. These results also provide specific evidence relevant to government agencies seeking to update policies and extend the scope of mandatory CSR assurance to other environmentally sensitive industries.
Journal Article