contingent capital tail risk and debt induced collapse we study the design and incentive effects of contingent convertible debt with contingent convertibles the endogenous bankruptcy boundary can be at either of two levels one with lower default risk or one at which default precedes conversion an increase in debt moves the firm from the first regime to the second a phenomenon we call debt induced collapse setting the conversion trigger sufficiently high avoids this hazard given this condition we investigate the effect of contingent capital and debt maturity on optimal capital structure debt overhang and asset substitution we calibrate the model to large banks during the financial crisis received april 10 2015 editorial decision march 20 2017 by editor leonid kogan

debt overhang global growth opportunities and investment abstract using a pan european data set of 8 5 million firms we find that firms with high debt financing invest relatively more than otherwise similar firms if they are operating in sectors facing good global growth opportunities the positive impact of a marginal increase in debt on investment in good global growth opportunities sectors disappears if firm debt is already excessive if it is dominated by short maturities and during systemic banking crises our results are consistent with theories of the disciplining role of debt as well as with models highlighting the negative link between firm and bank related agency problems and corporate investment

why does sovereign risk differ for domestic and external debt evidence from scandinavia 1938 1948 abstract this study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt the analysis uses new evidence from danish and swedish bond markets around world war ii a time when markets went from being fully integrated to fully segmented overnight by linking the exogenous wartime shocks to changes in default costs on domestic and external debt it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets the results suggest that governments can choose strategically on which debt the domestic or the external to default on and that this decision hinges on the relative size of the political default costs

a note on liquidity risk management when a firm is unable to roll over its debt it may have to seek more expensive sources of financing or even liquidate its assets this paper provides a normative analysis of minimizing such rollover risk through the optimal dynamic choice of the maturity structure of debt the objective of a firm with long term assets is to maximize the effective maturity of its liabilities across several refinancing cycles rather than to maximize the maturity of the current bonds outstanding an advantage of short term financing is that a firm while in good financial health can readjust its maturity structure more quickly in response to changes in its asset value this abstract was borrowed from another version of this item

how excessive is banks maturity transformation we quantify the gains from regulating banks maturity transformation in an infinite horizon model of banks which finance long term assets with non tradable debt banks choose the amount and maturity of their debt trading off investors preference for short maturities with the risk of systemic crises as in stein 2012 pecuniary externalities make unregulated debt maturities inefficiently short the assessment is based on the calibration of the model to eurozone banking data for 2006 lengthening the average maturity of wholesale debt from its 2 8 months to 3 3 months would produce welfare gains with a present value of euro 105 billion

how big is the debt overhang problem abstract i re examine the debt overhang problem where the flexible investment level rather than the irreversible decision whether or not to operate is used to measure the underinvestment caused by debt financing i measure a large overhang cost with long term debt or short term debt as is standard underinvestment with long term debt is more severe when investment opportunities are poor and is mitigated as opportunities improve in contrast underinvestment with short term debt remains significant even when investment opportunities are good firms lever up as opportunities improve to take advantage of tax shields so that equity claimants still face the incentive to underinvest

observing bailout expectations during a total eclipse of the sun abstract the literature has not reached a consensus yet regarding the existence of sovereign creditor moral hazard exploiting an exceptional historical example this paper proposes an original method to address this issue as the corona which is observable only during a total eclipse of the sun market specific prices of repudiated bonds are observable only when extreme conditions segment the markets such very rare events allow for isolating pure country specific bailout expectations the paper shows that bailouts do create creditor moral hazard based on an impulse response analysis the econometric results further emphasize the influence of bailout expectations in sovereign bonds valuation

the determinants of sovereign bond liquidity during wwi abstract what was wwi s impact on securities markets liquidity investigated is the cross section of sovereign bonds traded in amsterdam prime determinants of a bond s wartime liquidity are its pre war liquidity above median age on the run status and link to a minor war party

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

vertical debt spillovers in emu countries abstract this article examines the extent to which subnational governments may drive sovereign risk premiums is subnational fiscal policy affecting the interest rates on central government bonds furthermore we focus on a number of causal mechanisms that may mitigate or reinforce these upstream vertical spillovers i e the presence of bailout expectations and subnational borrowing autonomy our findings indicate that debt accumulation by subnational governments sng spills over onto sovereign risk premiums when the restrictions on sng borrowing are weak and when investors believe that subsovereign debts are backed by the center the results suggest that spillovers may be reduced through a proper design of a country s fiscal and institutional framework countries should either bolster the sovereignty of subnational governments by increasing sng fiscal autonomy or tightening up sng borrowing constraints

how do official bailouts affect the risk of investing in emerging markets we analyze the effects of bailout expectations on sovereign bond spreads in emerging markets the non bailout of russia in august 1998 is interpreted as an event that decreased the perceived probability of future crisis lending to emerging markets if official rescues are expected to mitigate the losses of investors in the event of a crisis such an event should raise the cross country dispersion of spreads because investors pay more attention to differences in risk characteristics across countries we find strong evidence for such an effect this is consistent with the existence of investor moral hazard at least prior to 1998

an empincal examiation of the factor endowments hypothesis cross country regression of net exports on factor endowments has suggested that endowments provide a good explanation of international trade patterns in manufactures this paper examines whether endowments explain the composition of manufacturing activity as is proposed for the most policy relevant versions of the heckscher ohlin samuelson model or merely the level of manufacturing activity application of the cross country method to output data suggests that endowments do not provide a good explanation of composition

the impacts of net stable funding ratio requirement on banks choices of debt maturity abstract in this paper we study the impacts of the net stable funding ratio nsfr requirement on banks choices of debt maturity and asset structures with consequences for banks profitability and social welfare we develop a model in which the manager of a bank determines both debt maturity structure short term vs long term debt and asset composition cash vs risky assets to address the incongruence of goals between the bank manager and the bank stakeholders in our model we assume that the manager receives only a proportion of the bank s profit in her pay schedule we demonstrate that the optimal choices of the manager regarding debt maturity and asset structure lead to socially inefficient second best outcomes because the manager internalizes only part of the social benefit we then study the implications of the nsfr requirement on the manager s choices and demonstrate that the nsfr requirement can enhance social welfare and reach an efficient first best outcome if a sufficiently low weight of short term debt as available stable funding is required by regulation further we find that under the same conditions the nsfr requirement reduces banks use of short term financing and thus increases the probability of banks survival and profits from the ex ante point of view while it decreases banks profits from the ex pos t point of view since it reduces the threshold for banks survival our main results have some interesting empirical implications under certain conditions the nsfr requirement may reduce both bank failures and banks observed profits

changes in the international distribution of resources and their impact on u s comparative advantage t he heckscher ohlin h o theory suggests international trade is determined by relative resource supplies among countries prior empirical research such as work on the determinants of u s comparative advantage in a single year has concentrated on the static predictions of h o theory however h o theory also suggests changes over time in resource supplies will alter trade structure the present paper investigates this aspect of h o theory particular emphasis is given to the role of world resource changes as an explanation of changes in u s trade and of the increased international competition in manufactured goods faced by the united states some recent studies have examined the relationship between changes in resource endowments and trade heller 1976 examined changes in the factor content of japan s trade between 1958 and 1968 and found the observed patterns consistent with changes in japan s physical and human capital endowments stern and maskus 1981 investigated changing factor input determinants of u s trade by estimating annual cross section regressions over 1958 77 they suggested u s net exports made less direct use of unskilled labor over time further analysis of the factor content of u s trade suggested increased u s abundance in physical capital relative to human capital between 1958 and 1971 balassa 1979 using a 1970 crosssection of countries concluded that physical and human capital accumulation largely explained changing patterns of comparative advantage in manufactures although these studies made important contributions a number of issues remain concerning the relationship between resources and trade stern and maskus in listing directions for further research cite first an examination of how and why endowments of physical capital human capital and labor have changed within the u s and our major trading partners this paper reports a substantial data effort which addresses this topic another important consideration is that the direct effect of resource endowment variation on trade has yet to be determined previously inferences about the effect of resource endowments on trade have been based primarily on results from industry cross section regressions authors of such work indirectly infer the effect of resource variation on trade by assuming the coefficients from such regressions reflect resource abundance however leamer and bowen 1981 recently demonstrated that signs of coefficients from such regressions need not reflect a country s true resource abundance thus the usual negative coefficient for the capital labor ratio in an analysis of u s trade cannot be used to infer the scarcity of capital and thus cannot be used to infer the effect of an increase in capital endowment on u s trade similarly balassa s procedure of first regressing for each of a sample of countries industry trade on input intensity and then using the estimated coefficients as the dependent variable in a cross country regression on resources is an inappropriate method for inferring the effect of resources on trade this paper advances consideration of these issues by investigating aspects of the relationship between resources and trade section ii examines changing patterns of resource supply among thirty four countries over 1963 75 section iii investigates whether these resource changes are associated with altered comparative advantage in manufactured goods section iv uses cross country regressions to estimate the resource endowment as opposed to factor input determinants of u s manufacturing trade and thereby the direct effect of resource variation on u s trade the received for publication april 23 1981 revision accepted for publication november 30 1982 new york university this paper is an outgrowth of research in bowen 1980a and of further work conducted at ucla under a ford foundation grant directed by edward e leamer an earlier version was presented at the 1980 southern economic association meetings in washington d c comments by c michael aho robert baldwin edward leamer joseph pelzman leo sveikauskas and an anonymous referee are gratefully acknowledged the author remains responsible for errors

the determinants of the maturity of corporate debt issues we document the determinants of the term to maturity of 7 369 bonds and notes issued between 1982 and 1993 our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum this pattern is consistent with the theory that risky firms do not issue short term debt in order to avoid inefficient liquidation but are screened out of the long term debt market because of the prospect of risky asset substitution traditionally capital structure research has focused on how much of a firm s future cash flows should be paid out to debtholders instead of equityholders an equally important issue is when future cash flows should be paid out to debtholders a firm that finances its projects with short term debt risks serious financial difficulty if the debt cannot be extended similarly a firm that finances its activities with long term debt can sacrifice profits by needlessly risking mismanagement of resources after cash flows are returned from investments but before they are due to debtholders this study investigates the factors that firms consider when choosing the maturity of their liabilities we document the determinants of the maturity of 7 368 public debt issues made by u s corporations between 1982 and 1993 our empirical tests are based on existing theoretical models that relate the maturity of a firm s borrowings to the riskiness of its cash flows the time until investments pay off the quality of information held by outsiders the expected

uninsured deposits as a monitoring device their impact on bond yields of banks abstract we empirically analyze the impact of uninsured deposits on a bank s cost of public debt uninsured depositors can exert market discipline over a bank and potentially reduce its agency cost of debt through informed monitoring we use a sample of public bond issues by u s bank holding companies from 1994 to 2013 and find statistically strong evidence that banks with more uninsured deposits relative to their assets issue bonds with a lower interest rate findings suggest a one standard deviation increase in uninsured deposits is associated with a 46 64 basis point decrease in bond yield in addition we find that bonds issued by banks with higher default risk or lower reputation benefit more from uninsured savers our paper contributes to the literature that explores market discipline and provides evidence that banks can benefit from it through a lower borrowing cost

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

the shadow costs of repos and bank liability structure making use of a structural model that allows for optimal liquidity management we study the role that repos play in a bank s financing structure in our model the bank s assets consist of illiquid loans and liquid reserves and are financed by a combination of repos long term debt deposits and equity repos are a cheap source of funding but they are subject to an exogenous rollover risk we show that the use of repos inflicts two types of indirect shadow costs on the bank s shareholders first it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk second it adds to the cost of long term debt financing these shadow costs limit the bank s appetite for cheap but unstable repo funding this effect is however weakened under poor returns on risky assets access to deposit funding and the depositor preference rule we also analyze the impact of a liquidity coverage ratio payout restrictions and a leverage ratio on the bank s financing choices and show that all these tools are able to curb the bank s reliance on repos

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

how does liquidity affect government bond yields the paper explores the determinants of yield differentials between sovereign bonds using euro area data there is a common trend in yield differentials which is correlated with a measure of aggregate risk in contrast liquidity differentials display sizeable heterogeneity and no common factor we propose a simple model with endogenous liquidity demand where a bond s liquidity premium depends both on its transaction cost and on investment opportunities the model predicts that yield differentials should increase in both liquidity and risk with an interaction term of the opposite sign testing these predictions on daily data we find that the aggregate risk factor is consistently priced liquidity differentials are priced for a subset of countries and their interaction with the risk factor is in line with the model s prediction and crucial to detect their effect

imf bailouts and moral hazard this paper empirically investigates the extent of investor moral hazard associated with imf bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of imf bailouts of countries undergoing financial crisis we do not find strong evidence that the extent of investor moral hazard changed after the non bailout of russia in august 1998 that signaled a modification to imf intervention policy in contrast we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the imf and that are thereby more likely to be bailed out by the imf this pattern prevailed even after the russian crisis

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

a theory of multiperiod debt structure we develop a theory of multiperiod debt structure a simple trade off between the termination threat required to make debt repayments incentive compatible and the desire to avoid early liquidation determines the number of repayments their timing and amounts as firms increase their borrowing they add periodic risky repayments from the back of the maturity structure with the time between repayments increasing in cash flow risk cash flow growth or a significant risk free cash flow component limits the number of risky repayments firms with a significant risk free cash flow component choose dispersed maturity profiles with smaller relatively safe repayments every period rather than riskier periodic repayments

dynamic debt maturity a firm chooses its debt maturity structure and default timing dynamically both without commitment via the fraction of newly issued short term bonds equity holders control the maturity structure which affects their endogenous default decision a shortening equilibrium with accelerated default emerges when cash flows deteriorate over time so that debt recovery is higher if default occurs earlier self enforcing shortening and lengthening equilibria may coexist with the latter possibly pareto dominating the former the inability to commit to issuance policies can worsen the leland problem of the inability to commit to a default policy a self fulfilling shortening spiral and adverse default policy may arise received april 16 2015 accepted february 20 2016 by editor itay goldstein

an empirical analysis of stock and bond market liquidity this article explores cross market liquidity dynamics by estimating a vector autoregressive model for liquidity bid ask spread and depth returns volatility and order flow in the stock and treasury bond markets innovations to stock and bond market liquidity and volatility are significantly correlated implying that common factors drive liquidity and volatility in these markets volatility shocks are informative in predicting shifts in liquidity during crisis periods monetary expansions are associated with increased liquidity moreover money flows to government bond funds forecast bond market liquidity the results establish a link between macro liquidity or money flows and micro or transactions liquidity a number of important theorems in finance rely on the ability of investors to trade any amount of a security without affecting the price however there exist several frictions 1 such as trading costs short sale restrictions and circuit breakers that impact price formation the influence of market imperfections on security pricing has long been recognized liquidity in particular has attracted a lot of attention from traders regulators

two by two international trade theory with many goods and factors this paper adopts a new approach to the problem of generalizing the properties of the two by two heckscher ohlin model asking whether we can obtain results which hold in very general models for dichotomous categories of commodities and factors using duality theory some results of this kind are derived which generalize certain properties of the heckscher ohlin model to models which allow for any number of goods and factors joint production international factor mobility and substitution between primary factors and intermediate inputs the consequences of assuming sector specific factors and equal numbers of goods and factors are also examined

the maturity structure of corporate debt we provide an empirical examination of the determinants of corporate debt maturity our evidence offers strong support for the contracting cost hypothesis firms that have few growth options are large or are regulated have more long term debt in their capital structure we find little evidence that firms use the maturity structure of their debt to signal information to the market the evidence is consistent however with the hypothesis that firms with larger information asymmetries issue more short term debt we find no evidence that taxes affect debt maturity

stock and bond market liquidity a long run empirical analysis this paper establishes liquidity linkage between stock and treasury bond markets there is a lead lag relationship between illiquidity of the two markets and bidirectional granger causality the effect of stock illiquidity on bond illiquidity is consistent with flight toquality or flight to liquidity episodes monetary policy impacts illiquidity the evidence indicates that bond illiquidity acts as a channel through which monetary policy shocks are transferred into the stock market these effects are observed across illiquidity of bonds of different maturities and are especially pronounced for illiquidity of short term maturities the paper provides evidence of illiquidity integration between stock and bond markets