international institutional lending arrangements to sovereign borrowers abstract recent financial crises in east asia and elsewhere have illustrated the problems that plague emergency liquidity arrangements and the lender of last resort role of the international monetary fund and other international institutions in particular these act under conditions of extreme uncertainty where potential sovereign borrowers as well as private financial institutions are kept in the dark regarding the intentions of the emergency lenders and the amounts and terms of emergency liquidity that can be tapped from april 1999 longer term credit lines are being offered by the imf designed to be awarded to healthy countries before they experience contagion or distress the paper evaluates the advantages of this form of imf lending and this new trend in imf operations it is argued that provision of imf financing through such long term lending facilities is better in some senses than shorter term lending long term contracts reduce the uncertainty with respect to imf intentions moral hazard problems are reduced for the borrowing country and financial markets know the future level and terms of imf support another advantage is that long term loan contracts improve the allocation of resources within the borrowing country much as private sector facility lending is the dominant mode of finance in many markets so facility lending has efficiency advantages when it is provided by the imf this efficiency advantage is derived formally it is shown that sovereign borrowers are actually better off when utilizing these as backup lines of credit instead of emergency borrowing that is conducted after distress occurs facility lending by international institutions can lead to a welfare improvement and superior resource allocation for sovereign borrowers the intuition for this is that when financial distress drives these borrowers to increase their debt risk premia in borrowing rates would not rise at least up to the limits established by the size of the facility

trade interdependence the international financial institutions and the recent evolution of sovereign debt renegotiations abstract this paper analyzes the effect of a debtor country s pattern of trade with commercial creditors home countries on the outcome of debt rescheduling negotiations the analysis reveals that a debtor country with more market power has greater leverage in a three way debt rescheduling negotiation that includes the debtor country its creditors and the international financial institutions ifis the paper also considers the effects of the ifi sovereign debt policy on the bargaining power of the parties in debt rescheduling negotiations two bargaining frameworks analyzed and compared in the paper represent the negotiation mechanism at different stages of the ifi sovereign debt policy evolution

the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

banking panics information and rational expectations equilibrium this paper shows that bank runs can be modeled as an equilibrium phenomenon we demonstrate that some aspects of the intuitive story that bank runs start with fears of insolvency of banks can be rigorously modeled if individuals observe long lines at the bank they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run however bank runs occur even when no one has any adverse information extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations banking panics were a recurrent phenomenon in the united states until the 1930s they have re emerged as a source of public concern and much theoretical research recently in this paper we provide an information theoretic rationale for bank runs the traditional story is that contagion is an important aspect of bank runs the idea seems to be that when the general public observes large withdrawals from the banking system fears of insolvency grow resulting in even larger withdrawals of deposits in our model some individuals withdraw because they get information that future returns are likely to be low uninformed individuals observing this also have an incentive to liquidate their investments in addition some individuals need to withdraw deposits for other than informationally based reasons thus if the random realization of such a group of individuals is unusually large then the uninformed individuals will be misled and will precipitate a run on the bank the technology is such that a large volume of withdrawals involves liquidation costs consequently runs on the bank do impose social costs a mechanism that may reduce these costs in our model is to suspend convertibility if withdrawals are high however those individuals who need to withdraw their assets for liquidity reasons are worse off ex post our model provides a rationalization for restrictions in demand deposits that were widespread prior to 1929 friedman and schwartz 7 suggest that restrictions of payments ensured

presidential address collateral and commitment optimal dynamic capital structure choice is fundamentally a problem of commitment in a standard trade off setting with shareholder debtholder agency conflicts full commitment counterfactually predicts the firm would rely almost exclusively on debt financing conversely absent commitment a modigliani miller like value irrelevance and policy indeterminacy result holds thus the content of dynamic trade off theory must depend on the commitment technology in this context collateral is valuable as a low cost commitment device because ex ante optimal commitments are likely to be suboptimal ex post observed capital structure dynamics will exhibit hysteresis and depart significantly from standard predictions

the information content of annual earnings releases a trading volume approach this paper reports the results of an empirical examination of the relations between the volume of securities traded the magnitude of surprises in annual earnings announcements and firm size although early trading volume studies e g beaver 1968 kiger 1972 and foster 1973 replicated basic information content studies with findings similar to those based on security prices we should not expect that security price and trading volume research will continue to yield identical results when more refined hypotheses are tested trading volume reflects investors activity by summing all market trades whereas security prices reflect an aggregation or averaging of investors beliefs as a result we will on occasion observe differences between price and volume reactions to earnings announcements as did morse 1981 this study extends the recent trend toward tests of more refined hypotheses by using a larger sample to examine the associations between unexpected earnings firm size and trading volume and testing whether such associations can be generalized across fiscal year end dates and stock exchange listing my results show a continuous positive relationship between trading

the impact of usury ceilings on consumer credit usury regulation is a topic with a long history of discussion nevertheless the debate over the merits of usury regulation continues to the present day in the early part of the 1980s the rapid rise in nominal interest rates swung the debate in favor of the opponents of usury ceilings during this period a quarter of the states enacted legislation which largely eliminated their usury ceilings on consumer credit however with the return of lower interest rates in the middle part of the decade the argument for low usury ceilings gained increasing support and as a result several states lowered their usury ceilings on some types of credit the first formal economic model of the impact of usury ceilings was outlined by blitz and long 8 their insightful analysis has led researchers to focus on two hypotheses concerning the impact of usury ceilings on consumer credit hypothesis 1 usury ceilings reduce the quantity of credit obtained by high risk borrowers

the value relevance of intangibles the case of software capitalization the value relevance of intangibles the case of software capitalization author s david aboody and baruch lev source journal of accounting research vol 36 studies on enhancing the financial reporting model 1998 pp 161 191 published by blackwell publishing on behalf of accounting research center booth school of business university of chicago stable url http www jstor org stable 2491312 accessed 14 09 2010 16 12

a theory of trading volume a theory of trading volume is developed based on assumptions that market agents frequently revise their demand prices and randomly encounter potential trading partners the model describes two distinct ways informational events affect trading volume one is consistent with conjectures made by empirical researchers that investor disagreement leads to increased trading but the observation of abnormal trading volume does not necessarily imply disagreement and volume can increase even if investors interpret the information identically if they also have had divergent prior expectations simulation tests support the model and are used to contrast the random pairing environment with costless market clearing volume is lower in the costly market and volume increases caused by an informational event persist after the event period this is consistent with existing empirical evidence and suggests that markets do not immediately clear all orders or that investors have demands to recontract

organizing debt relief the need for a new institution the banks they extended large short term credits to mexico then put pressure on the banks to reschedule mexican debt and lend more to mexico once the international monetary fund had endorsed the policies that mexico would follow to deal with its problems this was the birth of the case by case approach to the debt problem it was predicated implicitly on the belief that debtors faced a short term problem arising from an unusual combination of worldwide recession and high interest rates brought on by a shift in the policy stance of the major industrial countries on this view it was eminently sensible for debtors to take on more debt temporarily in order to pay interest on their existing debts the problem was still with us three years later however and the case by case approach was in trouble the world economy was growing again and interest rates had fallen but the debtor s export earnings were not growing and their governments were increasingly reluctant to deal with the imf which was asking for more austerity but providing less fund credit the banks were willing to reschedule larger amounts of debt for longer intervals but would put up new money only for the largest debtors

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

does anticipated information impose a cost on risk averse investors a test of the hirshleifer effect this paper theoretically and empirically investigates how the risk of future adverse price changes created by the anticipated arrival of information influences risk averse investors trading decisions in institutionally imperfect capital markets specifically i examine how the selling activity of individual investors immediately following an earnings announcement is influenced by the tradeoff between risk sharing benefits of immediate trade and explicit transaction costs imposed on such trades consistent with my theoretically derived predictions i find that investors current trading decisions are less sensitive to the incremental transaction costs created by short term capital gains taxes on trading profits as both the duration and intensity of the risk of future adverse price changes increase this evidence is consistent with an incremental cost to investors that results from the revelation of precise information which is commonly referred to as the hirshleifer effect

an aggregate model of the credit union industry prior to 1971 credit unions cus were almost exclusively short term lenders with their deposit base consisting primarily of passbook share accounts radical institutional changes during the 1970 s have reshaped the industry and increased the competition between cus and other financial institutions the introduction of federal share insurance in 1971 coupled with the highest deposit ceiling allowed by regulators allowed cus to attract funds from other intermediaries while cus have a yield advantage they have been much slower to introduce day of deposit to day of withdrawal interest accumulation so that many cu deposits may be regarded more as short term certificate accounts rather than open passbooks thus as the federal reserve system and the federal home loan bank board have liberalized cu yields maturities and minimum denominations it has affected cus ability to attract share deposits substantial competition exists in loan markets as well banks finance companies and the credit acceptance subsidies of many manufacturing corporations also extend consumer credit while cus have entered mortgage markets in this study a six equation simultaneous model is developed to estimate three different aggregate flows within the industry new loan extensions net share flows and net change in financial investments two price variables the average cu loan rate and average dividend rate and the median maturity on newly extended loans to account for endogenous changes in non price terms which may affect both the supply and demand for loans this study is important to both researchers and policymakers despite the movement to make credit unions more like and more competitive with other financial institutions there remains a general perception that cus are different that they cannot be analyzed by applying well known economic theories and methods and that they remain insulated from both general economic conditions and competition the evidence from this study suggests that those perceptions are in error even though the industry remains small relative to other providers of consumer financial services because cus are no longer insulated it is important to know the impact of changing economic conditions on the industry department of economics john carroll university funding by the national credit union administration ncua is gratefully acknowledged participants in a seminar at ncua provided the author with seveal suggestions which were incorporated in the research special thanks are due to john wolken who spent countless hours in discussion with the author and catherine melfi and george kosicki who provided research assistance any remaining errors or omissions are the sole responsibility of the author

accounting window dressing and template regulation a case study of the australian credit union industry this article documents the response of cooperative institutions that were required to adhere to new capital adequacy regulations traditionally geared for profit maximising organisations using data from the australian credit union industry we demonstrate that the cooperative philosophy and internal corporate governance structure of cooperatives will lead management to increase capital adequacy ratios through the application of accounting window dressing techniques this is opposite to the intended purpose of template regulation aimed at efficiently increasing operating margins and lowering risk our results raise several debatable issues regarding the ethics of accounting management and the imposition of one shoe fits all external regulation

evaluating debt repurchases what are the alternatives to investment abstract a general model of debt repurchases is built which reconciles most points raised in the literature on buybacks the inclusion of assets alternative to domestic investment is shown to be of crucial importance in the analysis and leads to the reversal of some previous results it is shown that investment necessarily rises following a buyback independently of the source of the funds used the condition that determines whether or not buybacks are an attractive solution to the debtor is derived it is shown to depend on the price at which debt can be bought and on an interest differential effect

sovereign debt structural adjustment and conditionality abstract the lack of a proper enforcement mechanism for sovereign debt generates a commitment failure as a result a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure formalizing this argument we show that conditionality helps the repayment of sovereign debt in certain circumstances it can eliminate debt overhang especially when it is coupled with concessionary lending of sufficient magnitude it is however unable to restore first best when it is anticipated by lenders conditionality may get international financial institutions and sovereign debtors into a trap where the debt overhang persist debt rescheduling takes place periodically and conditionality continues indefinitely

is it punishment sovereign defaults and the decline in trade sovereign defaults are associated with declines in defaulting countries trade are these declines the result of trade sanctions as the trade sanctions argument of sovereign borrowing would suggest we devise an empirical strategy to evaluate this issue based on the idea that if trade sanctions are causing the declines bilateral trade with creditor countries should fall more than trade with other countries we find that this is not the case the analysis does not yield much evidence of broader punishment strategies including a league of major creditors either these results contradict the predictions of the trade sanctions theory of sovereign borrowing

debt and incentives in a dynamic context abstract the incentive problems associated with debt overhang have been shown to make debt forgiveness potentially pareto improving models studying this argument abstract from the long term character of the credit relationship we show that the debt forgiveness argument is strengthened when incentive problems are considered in a multi period context

bankruptcy proceedings for sovereign state insolvency the paper examines the main issues involved in translating domestic bankruptcy procedures to the sovereign context it considers some of the principles by which domestic bankruptcy procedures operate and the extent to which they apply to international lending two recent proposals are considered in more detail that of krueger a new approach to sovereign debt restructuring and that of pettifor chapter 9 11 resolving international debt crises the jubilee framework for international insolvency the paper also considers the question of the ex ante effects of a procedure which makes default less costly and concludes that despite a negative impact on the ability to borrow the overall welfare effect need not be negative

debt relief and the international enforcement of loan contracts it is now apparent that the governments of many developing countries will not repay their debts as initially contracted creditors have already forgiven loans to some poor borrowers in africa loans to several middle income borrowers mostly in latin america trade in secondary markets at enormous discounts below 10 percent of face value in some cases creditors and debtors are negotiating the status of these debts with relief now likely for them as well since 1983 the situation has been seen to be sufficiently troubled to constitute a debt crisis although whether the debts actually caused the stagnation and financial chaos in many debtor countries is questionable poor economic management at home along with some adverse changes abroad probably have more to do with their plight while the debts themselves may not have caused the crisis creditors and creditor governments must now adjust to the realization that full repayment is either infeasible or that enforcing full payment is undesirable from the point of view of creditor countries as a whole the question now is what to do with these debts the baker and brady plans have increased u s government involvement in the debt crisis and have allocated public money toward its resolution the kenen plan discussed in this issue proposes still more public involvement and in all likelihood more public money each of these plans is an ad hoc response to the impasse that has arisen between some highly indebted countries and their private creditors and aspects of each plan may help resolve this impasse but none of these plans confronts the features of international capital markets that led to the crisis in the first place my argument here is that the debt crisis that began in 1983 arose from defects in how international capital markets operated the previous decade a goal of any

basic analytics of multilateral lending and surveillance abstract i analyse the role of multilateral financial institutions in a world of global capital markets assuming that they have an informational advantage over private lenders in the market for sovereign debt i show that the adverse selection problem in this market may be solved through certification if the multilateral agency does not care too much about borrower country welfare however with lending the private information of the agency will be revealed whatever its weighting of borrower welfare vs private lenders profits multilateral lending on concessional terms also alleviates the moral hazard problem that investment in creditworthy borrowers is reduced as private lenders seek to avoid ex post default by constraining credit

non defaultable debt and sovereign risk abstract we quantify gains from introducing limited financing through non defaultable debt into a model of equilibrium sovereign risk for an initial sovereign spread of 4 2 introducing the possibility of issuing non defaultable debt for up to 10 of aggregate income reduces immediately the spread to 1 5 and implies a welfare gain equivalent to a permanent consumption increase of 0 8 nevertheless the spread reduction achieved by the introduction of non defaultable debt is short lived our findings shed light on different aspects of proposals to introduce common euro area sovereign bonds that could be virtually non defaultable

debt overhang in a business cycle model abstract we study the macroeconomic implications of the debt overhang distortion on firms investment and labor decisions we show that the distortion arises when the levels of investment and labor are non contractible and chosen after the signing of the debt contract the financial friction manifests itself as investment and labor wedges that move counter cyclically increasing during recessions when the risk of default is high their dynamics amplify and propagate the effects of shocks to productivity government spending volatility and funding costs both the size and the persistence of these effects are quantitatively important

mexico s investment collapse debt or oil abstract this paper tests three explanations for mexico s investment collapse in the early 1980s the oil price decline the termination of capital inflows and debt overhang uncertainty effects using previously ignored investment data on private sector industries the data consistently point to the importance of the rise in the relative price of investment goods driven in large part by falling world oil prices but the data also allow a role for the termination of capital inflows however after controlling for these effects the paper finds little evidence for debt overhang effects heightened uncertainty or other commonly cited explanations in the literature jel f34

recent experience with commercial bank debt reduction has the menu outdone the market abstract debt reduction at market terms has been criticized as too expensive from the point of view of the debtor the recent reduction agreements following the menu approach are partially concerted but they also possess some elements of voluntariness this raises two issues a what is the conceptual justification for such financial arrangements and b based on recent evidence to what extent have these arrangements reduced the cost of debt reduction in a review of six recent menu driven debt reduction agreements we find that the debtors achieved a far better financial result than would have been feasible with simple market buybacks

assessing and managing external debt problems in nigeria abstract the paper addresses some of the major issues in external debt management from the point of view of a borrowing country it has been found that frequent occurrence of debt and debt servicing problems among less developed countries ldcs can be traced to poor debt management despite the awareness of the need to develop an effective debt management capability and formulate specific debt management policies formal debt models have yet to enjoy wide application in many african countries whereas there are many debt management systems which debtor countries can adopt most african countries are not using them because of several constraints an analytical framework which can be used to formulate sound debt management policies is proposed and applied using nigeria as a case study

debt write downs and debt equity swaps in the two sector model abstract debt overhang models have motivated the possibility of pareto improving market based debt reduction schemes through the assumption that creditors can seize debtor output under default these models usually reach the conclusion that both debtor financed debt repurchases and debt equity swaps are not in the interest of debtor nations this paper re examines these conclusions for a debtor nation that also has a safe sector which is unexposed to seizure debt overhangs are then shown to distort the composition of investment in the debtor nation nominal debt reductions mitigate these distortions enhancing the potential for pareto improving debt equity swaps

the timing of multilateral lending bargaining over the terms of multilateral lending can be a prolonged process we model failure to come to quick agreement as a screening device policy makers who find conditionality especially costly delay to signal their type we show that increased costs to not reaching agreement whether borne by borrowers or lenders can increase the chances of delay the imf s high profile involvement in recent crises in asia and russia illustrates the way international lenders and borrower governments delay to extract concessions loans from the fund and other international lenders such as the world bank and the united states treasury are accompanied by detailed requirements for policy changes borrower countries bargain hard on the package of reform measures they are obliged to adopt and standoffs in negotiations are common an example is the negotiations between the fund and the indonesian government beginning in autumn 1997 the fund was critical of the indonesian authorities failure to carry out a series of detailed structural reforms and hostile to the suharto government s expressed intention to introduce a currency board as a banker commented the more you talk about a currency board the more you delay the debt restructuring agreement it was not until april 1998 that an agreement was reached indonesia gave up on the currency board and the imf conceded that the government could continue subsidising food and energy a problem with the use of strategic delay to extract concessions is that the backdrop to such negotiations is often a worsening economic situation postponing agreement can severely exacerbate the costs to both borrowers and lenders if it leads to high inflation a loss of confidence in the banking system political backlashes or contagion the recent confrontation between indonesia and the fund raised the prospect of a break off of negotiations the indonesian rupiah fell by 25 the jakarta stock market declined by 20 prices skyrocketed and civil unrest worsened in this paper we use bargaining theory to analyse the timing of loan agreements between international lenders and governments in times of possible crises and rising costs of postponement our model works as follows a country approaches international lenders for a loan the lenders want as much reform as possible they propose a programme yielding economic benefits to the country that requires some amount of reform as a condition the country may accept the programme in which case we suppose reform occurs or it may reject the package in which case the lenders may revise their proposal

do investors see through mistakes in reported earnings this study investigates whether investors see through materially misstated earnings and whether they anticipate earnings restatements for firms that restate at least one annual report we find that investors are misled by mistakes in reported earnings at the time of initial earnings announcements investors react positively to the component of the favorable earnings surprise that will subsequently be restated and they attach the same valuation to it as to the true earnings surprise we also find that investors anticipate the subsequent downward restatements and start marking stock prices down several months before a restatement announcement so that the full impact of a restatement is about three times as large as the restatement announcement effect indeed we show that investors punish restating firms because the stock price gains that shareholders enjoy when firms initially announce overstated earnings are more than reversed by the time of the restatement announcement

a theoretic framework for the analysis of credit union decision making this paper presents a formal theoretic framework to analyze credit union interest rates on loans and savings deposits the unique motivational and institutional features of a credit union in particular its structure as a financial service cooperative are used to develop the objective function this is based on a comparison of the credit union s rates to alternatively available market rates and includes parameters to recognize the possibility of borrower saver conflict the principal result is that the optimal rates and reactions to exogenous changes depend critically on the preference of the organization toward financial gain to the borrowing and saving members

analysts conflicts of interest and biases in earnings forecasts analysts earnings forecasts are influenced by their desire to win investment banking clients we hypothesize that the equity bull market of the 1990s along with the boom in investment banking business exacerbated analysts conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments we document shifts in the distribution of earnings surprises and related changes in the market s response to surprises and forecast revisions the evidence for shifts is stronger for growth stocks where conflicts of interest are more pronounced however shifts are less notable for analysts without ties to investment banking and in international markets

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

paired difference analysis of size economies in uk credit unions this study utilizes a paired difference approach to investigate for the existence of scale economies in uk credit unions the analysis is conducted for both credit unions in aggregate as well as a number of sub groups with the latter defined in terms of the trade organization to which credit unions are affiliated this decomposition was viewed as particularly important in that the respective umbrella organizations have different growth strategies the analysis revealed that significant efficiency gains are available through credit unions adopting a policy of asset growth this finding held good irrespective of the umbrella organization to which credit unions belong although the analysis also revealed that the opportunity for efficiency gains was not so pronounced for the members of one of the trade organizations the national federation of credit unions this finding was due to the nfcu s much more overt emphasis on self help and community development particularly in areas of economic disadvantage

sovereign debt optimal contract underinvestment and forgiveness in this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank the loan contract specifies both the amount of the loan and the promised interest payments and rationally reflects the investment decisions of the country and the possibilities of renegotiation and repudiation of the debt an important feature of the model is that at the initial negotiation of the loan there is uncertainty about whether the country will renegotiate for partial forgiveness in the future and whether it will eventually repudiate the debt even having successfully renegotiated moreover the probabilities of renegotiation and repudiation and the amount of possible forgiveness are endogenously determined in the model the repudiation decision is directly related to the underinvestment problem the objective of the renegotiation is precisely to alleviate this problem the model is used to analyze the effects of four variables on both the optimal contract and the country s welfare the degree of penalties that a bank can impose on a defaulting country the uncertainty of production the productivity of investments and the riskless interest rate the analysis has policy implications as well as testable predictions during the last ten years the issues related to less developed countries ldcs debt have become increasingly more important in the world economy the main reason for this is the significant increase in the amount of debt outstanding and the consequent higher yearly interest payments by 1988 seventeen highly indebted countries had an aggregated debt of 510 billion dollars see rogoff 1990 a second important reason is that starting in 1982 some of these countries suspended debt service payments creating a serious crisis of confidence in the banking system of the lending countries as a consequence borrowers and lenders have had to engage in negotiations including the rescheduling of the repayments and possibly partial forgiveness a number of papers have suggested that forgiveness could conceivably make both lenders and borrowers better off because the country

the economic institution of international barter starting with the international debt crisis in the 1980s international barter increased substantially more recently barter has emerged in russia and south east asia this paper examines how barter can help highly indebted countries to finance imports if they cannot use standard credit arrangements we argue that payment in goods is easier to enforce than payment in money however debtors may pay with inferior quality products we rank goods with respect to these incentive properties and derive the economic institution of commodity money which explains the trade pattern in barter our theoretical predictions are consistent with data on barter contracts

sovereign debt repurchases no cure for overhang troubled debtor countries do not gain by repurchasing external bank debt at market discount even if a buyback would stimulate investment by relieving debt overhang the reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment we show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals by comparing any given deal with a hypothetical market buyback of the same size one can derive upper and lower bounds on the gain to the country we apply our model to the 1990 mexican debt deal

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

prospective aid and indebtedness relief a proposal primary needs of human development are not met in poor development countries although ambitious goals have been set by the international community to meet specific human development targets by 2015 official development aid is lagging and excessive external debt continues to drain much needed resources from poor countries despite the recent hipc highly indebted poor countries initiative this paper outlines a 15 year program for implementing the 2015 human development targets while resolving fully the debt overhang problem for a set of 49 poor countries the proposal requires additional contributions from 23 rich countries amounting to 0 1 of 1 of their gdp over each of the 15y ears although only a small part of the effort would take the form of debt cancellation the outstanding debt of the 49 poor countries would be totally extinct by year 2015 the program to be implemented in a multilateral framework in which all interested parties have an effective voice relies on several basic premises a long term commitment by donors a fair burden sharing among creditors a fair distribution of newly available resources among poor countries heavily indebted or not a targeting of these resources to human development programs a conditionality guaranteeing reasonable aid effectiveness

rescheduling of sovereign debt forgiveness precommitment and new money to meet contractual obligations on their external debt lenders generally responded by rescheduling these debts rather than declaring them to be in default but further commercial lending to these sovereigns has virtually ceased these borrowers now face an enormous debt overhang while their lenders face substantial losses on their international loan portfolios among the many proposals for addressing this crisis the relative desirability of debt forgiveness and new lending has been the focus of considerable debate the baker plan of 1985 emphasized additional funding coupled with growth oriented domestic policies rather than debt reduction lenders were encouraged to provide additional funds new money to help the impaired and indebted economies grow their way back to creditworthiness however lenders were reluctant to offer new funds that would increase the sovereign s debt burden without some assurance that future repayment would be likely with debt generally recognized as providing borrowers with a disincentive for investment 1 the emphasis has now shifted to the need for debt forgiveness on the part of the lenders and a commitment to internal adjustment by the borrowers both parties are viewed as benefitting by a reduction of the inherited debt and possibly the provision of additional funds if the sovereign borrower can commit itself to adopting policies that reduce internal consumption and

a strategy for efficient debt reduction f or the past seven years the u s government has managed the debt crisis with the preeminent goal of sustaining the flow of debt servicing payments from the debtor countries to the commercial banks the focus on the banks especially in the first years of the crisis 1982 85 is easily explained several money center banks had exposure of nearly 200 percent of bank capital in latin america alone upon the outbreak of the crisis in 1982 a widespread suspension of debt service payments could well have sunk several major banks i have discussed the u s government s policy focus on the debt servicing to the commercial banks in sachs 1986b 1989c and sachs and huizinga 1987 but today those policies are being revised after years of steady decline in the exposure ratios of the most heavily exposed banks the risk of a u s banking crash as the result of the debt crisis is now virtually nonexistent in addition the burden of debt payments is contributing to profound economic crises and growing political instability in almost all of the democracies in latin america a wide range of analysts now concurs that the debt burden should be reduced not only for the sake of the debtors but also for the sake of the creditors who have an important long run stake in allowing the developing countries to surmount the current acute crisis the brady plan unveiled by secretary of treasury nicholas brady in march 1989 is based on the need for a reduction of the debt burden

debt relief for poor countries conditionality and effectiveness this paper studies the effectiveness of debt relief to stimulate economic growth in the most heavily indebted poor countries we develop a neoclassical framework with a conflict of interest between the altruistic donor and the recipient government and model conditionality as an imperfectly enforceable dynamic contract in contrast to the recent practice of fully cancelling debt optimal incentive compatible conditionality is accompanied by a concessionality level that implies a combination of subsidized loans and outright grants the optimal concessionality level depends on the recipient s access to international financial markets and on the strength of the conflict of interest incentive compatible transfers with optimal concessionality levels generate substantial welfare gains if the donor does not implement the optimal concessionality level and provides subsidized loans only then the effectiveness of transfers decreases in the long run with severe welfare implications in contrast transfers are less effective in the short run if the donor offers outright grants only

are buybacks back menu driven debt reduction schemes with heterogeneous creditors abstract we analyze the mechanics of menu driven debt reduction deals similar to those recently initiated by debtor countries in which heterogeneous banks choose freely between selling or retaining their debt claims we show that menu deals can facilitate discrimination across heterogeneous banks because of imperfections in the secondary market for debt this implies that menu deals are likely to dominate market buybacks and pure concerted relending agreements particularly when banks differ widely in their valuation of claims on the debtor

imf conditionality as a screening device a theoretical model is developed in which adoption of an imf programme signals a country s productivity it is assumed that there are two types of country one with a high return on investment and the other with a low return the country s type is known only to itself in the presence of a debt overhang the high productivity country may choose not to undertake the investment despite it being socially efficient to do so in this case the creditor would like to offer the country some debt reduction but the low productivity type will also benefit from the debt reduction this problem can be avoided if the country has sufficient resources to engage in a debt buyback in order to gain the debt relief only the high productivity type would be prepared to sacrifice current resources for the debt reduction and thus a separation of the types is achieved this is similar to an argument found in acharya and diwan 1993 we argue however that it is unlikely that a heavily indebted country will have sufficient resources for a buyback if the country is credit constrained an alternative screening mechanism is to undertake an imf programme in return for debt reduction and possibly an imf loan this mechanism can be the equilibrium outcome even if the programme creates only disutility for the country s policy makers

an economic analysis of debt swaps and case study of the harvard debt for education swap abstract evaluation of harvard university s debt for education swap with ecuador yields a clear bottom line harvard unambiguously gains from the deal since tuition receipts more than double initial outlays and the university acquires assets to fund research in ecuador ecuador s economic benefits however are less clear since the dollar outflow from ecuador may exceed the amount of new scholarship aid plus the true buyback value participants in future debt for education deals must consider both the uncertainty of economic gains and possible macroeconomic consequences for the debtor country

the relevance of the value relevance literature for financial accounting standard setting another view this paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors and provides insights into questions of interest to standard setters a primary focus of financial statements is equity investment other uses of financial statement information such as contracting do not diminish the importance of value relevance research value relevance questions can be addressed using extant valuation models value relevance studies address econometric issues that otherwise could limit inferences and can accommodate and be used to study the implications of accounting conservatism r 2001 elsevier science b v all rights reserved jel classification m41 m44 g12

trading volume reactions to annual accounting earnings announcements the incremental role of predisclosure information asymmetry abstract this study provides empirical evidence regarding the effect of annual accounting earnings announcements on investors trading behavior we find that the magnitude of trading volume reaction is an increasing function of both the magnitude of the associated price reaction and the level of predisclosure information asymmetry these results are consistent with kim and verrecchia s 1991a theoretical trading volume proposition

interest rates official lending and the debt crisis a reassessment the authors document and try to explain the sizable cross country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973 89 they find that indonesia and turkey which are often praised for not rescheduling in the 1980s paid interest rates substantially below libor and avoided the interest rate shock of the early 1980s differences in the default risk premium explain some of the variation among countries but different degrees of access to official loans carrying highly subsidized interest rates played the major role in the sample they studied they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates for the period 1981 89 it is possible to control for differences in the currency composition of debt and the results are essentially unchanged these results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross country differences in the burden of interest payments

optimal loan contracts and floating rate debt in international lending to ldcs abstract most ldc debt is at floating interest rate and the wisdom of this choice is analyzed here for a prototype ldc complete insurance requires repayment to increase with export revenues and import prices since the latter variables are positively correlated with libor floating rate debt yields better risk sharing than fixed rate debt and induces more investment in the ldc when default is possible repayment becomes contingent on the cost of sanctions is renegotiation states and some renegotiation costs are likely to be incurred fixed rate debt would have reduced the occurrence of default in the 80s but only marginally

the economic impact of the federal credit union usury ceiling this study measures the impact of the federal credit union usury ceiling on consumer credit availability and loan rates when binding the ceiling keeps loan rates low but it reduces credit union lending there is also evidence that a binding loan rate ceiling affects the competitiveness of credit unions in the market for deposits although the federal credit union act specifically mandates federally chartered credit unions to be a source of low cost consumer credit and to promote thriftiness it is not at all clear that the intent of the act is served by a binding usury ceiling

has the information content of quarterly earnings announcements declined in the past three decades this paper examines changes in the information content of earnings over the past three decades using the two metrics from beaver 1968 abnormal trading volume and abnormal return volatility we find no evidence of a decline in the information content of earnings announcements over the past three decades as measured by both abnormal trading volume and return volatility around quarterly earnings announcements if anything our results suggest an increase over time in the informativeness of quarterly earnings announcements variables reflecting changes in firm specific factors account for a portion of the observed increase

communication commitment and growth abstract we study the effect on the growth of an economy of alternative financing opportunities in a stochastic growth model with incentive constraints efficient accumulation mechanisms are designed and computed for economies that differ in their incentive structure we show that when borrowing is subject to information constraints there is a computable efficient transfer mechanism that does not affect capital accumulation and investment patterns even though consumption patterns and the distribution of wealth are affected in contrast enforcement constraints can severely reduce the outside financing opportunities and affect investment patters and economic growth we adapt numerical algorithms for obtaining numerical solutions of these models

sovereign liquidity crises the strategic case for a payments standstill is sovereign borrowing so different from corporate debt that there is no need for bankruptcy style procedures to protect debtors with the waiver of immunity sovereign debtors who already face severe disruption from short term creditors grabbing their currency reserves are also exposed to litigious creditors trying to seize what assets they can in a race of the vultures shielding sovereign debtors from inter creditor conflict by authorised standstills on payments doubt less runs some risk of debtor s moral hazard but the lack of an orderly procedure for resolving sovereign liquidity crises means that the imf is de facto forced to bail out countries in trouble this leads to both debtor and creditor moral hazard as investors lend without monitoring knowing that their investments are essentially guaranteed the strategic case for legalising standstills is to rescue the international financial system from this time consistent trap

determinants of the informativeness of analyst research abstract we examine cross sectional determinants of the informativeness of analyst research i e their effect on security prices controlling for endogeneity among the factors affecting informativeness analyst reports are more informative when the potential brokerage profits are higher e g high trading volume high volatility and high institutional ownership and lower when information processing costs e g more business segments are high we also find that the informativeness of analyst research and informativeness of financial statements are complements

earnings acceleration and stock returns abstract we document that earnings acceleration defined as the quarter over quarter change in earnings growth has significant explanatory power for future excess returns these excess returns are robust to a wide range of previously documented anomalies and a battery of risk controls the future return predictability appears to be consistent with investors assuming a seasonal random walk model for quarterly earnings and missing predictable implications of earnings acceleration for future earnings growth finally the excess returns from the basic earnings acceleration strategy can be enhanced further by focusing on profit firms low earnings volatility firms and on specific patterns of earnings acceleration

is foreign debt portfolio management efficient in emerging economies abstract this paper develops a simple model of foreign debt portfolio management the model suggests that under mild conditions the currency composition of a country s foreign debt portfolio is responsive to exchange rate movements empirical evidence is provided for a panel of 14 emerging economies in the period 1970 1998 attention is focused on the stocks of foreign liabilities denominated in us dollars deutschemarks dm japanese yen and swiss francs the results of the empirical analysis show that foreign debt portfolio management has been sub optimal in the countries under examination in these countries the currency composition of foreign debt has not reflected a substitution effect away from the currencies that have appreciated over time vis a vis the us dollar

debt buybacks debt reduction and debt rescheduling under asymmetric information in the early nineties there was a significant recovery of many debtridden economies after the shift in debt policy implicit in the socalled brady plan yet the use of scarce resources from debtor countries to buy back part of their debts remains a controversial feature of this plan we use a multiperiod model of debt overhang to show that under asymmetric information this transfer of resources emerges naturally as part of the shift from a strategy of debt rescheduling to one of debt reduction after nearly a decade of suffering from debt ridden economies in the early nineties many countries with large external debts finally reduced their debt service ratios regained access to spontaneous private financing and achieved higher growth and lower inflation imf 1993 many analysts have since attributed at least part of this success to the shift in the international debt strategy in 1989 which took a new direction with the so called brady initiative l a rather controversial feature of this initiative was the use of scarce resources from the debtor countries to buy back part of their debt there are two reasons why this use of a country s resources seems unwise first capital has more value in the debtor country than abroad thus transferring additional current resources from the country to its creditors at fair prices would appear to be welfare reducing second contrary to the idea that by repurchasing its debt in the open market a debtor country benefits from the discount price bulow and rogoff 1988 1991 prove under assumptions that include symmetric information that these buybacks hurt the country since the purchase price2 incorporates and transfers to the seller all the benefits caused by a reduced debt 3

have investors learned from the crisis an analysis of post crisis pricing errors and market corrections in us stock markets based on the reverse dcf model the traditional discounted cash flow dcf model is generally used to estimate the present value of an enterprise or its equity based on expected future parameters such as cash flows growth rate a

why do emerging economies borrow short term the authors argue that emerging economies borrow short term due to the high risk premium charged by international capital markets on long term debt they first present a model where the debt maturity structure is the outcome of a risk sharing problem between the government and bondholders by issuing long term debt the government lowers the probability of a liquidity crisis transferring risk to bondholders in equilibrium this risk is reflected in a higher risk premium and borrowing cost therefore the government faces a tradeoff between safer long term borrowing and cheaper short term debt second the authors construct a new database of sovereign bond prices and issuance they show that emerging economies pay a positive term premium a higher risk premium on long term bonds than on short term bonds during crises the term premium increases with issuance shifting toward shorter maturities this suggests that changes in bondholders risk aversion are important to understand emerging market crises

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

initial evidence on the role of accounting earnings in the bond market we document that 1 the incidence of bond trade increases during the days surrounding earnings announcements 2 there is a bond price reaction to the announcement of earnings and 3 there is a positive association between annual bond returns and both annual changes in earnings and annual analysts forecast errors all of these effects are larger when earnings convey bad news or when the underlying bond is more risky taken together our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market

the simple dynamics of a debt crisis abstract optimal growth path of an impatient neoclassical economy is studied when creditors impose a credit ceiling to prevent debt repudiation the ceiling becomes binding in finite time when the credit constrained regime begins foreign capital inflows and domestic investment fall abruptly output per capita consumption and real wages gradually decline while the real interest rate rises these results show that debt crises in which high external debt is associated to low growth can occur even in the absence of unanticipated shocks policy mistakes or debt overhang effects if distortionary policies cause impatient behavior the model is consistent with chronic capital flight in the debtor country jel f34 f32

the structure of an environmental transaction the debt for nature swap the structure and occurrence of debt for nature swaps are examined empirically contracts executing debt for nature swaps are studied to assess the role of transaction costs in determining how these agreements are structured the emerging contract form is a product of weak enforcement of legal claims to environmental resources in developing countries high costs for delineating and monitoring environmental outcomes and nominal government ownership of the resources involved the occurrence of swaps in individual countries is significantly related to host country attributes including the presence of tropical land and threatened species democratic political institutions and large debt burdens

output volatility and openness to trade a reassessment many economists believe that while openness to trade increases average gdp growth rates it also raises output volatility by exposing countries to terms oftrade shocks this view does not take into account that commercial trade might also reduce financially related volatility once this is taken into account the relationship between exposure to trade and output volatility is still an open question this paper presents new empirical evidence that suggests that the net effect of trade openness on output volatility is stabilizing the results confirm that exposure to trade raises output volatility through the terms of trade channel as previously documented in the literature but also show that this is counteracted by a quantitatively larger stabilizing effect additional evidence is presented showing that the latter effect comes at least in part through the financial channel the methodology employed seeks to correct for the likely endogeneity of trade in this setting using gravity estimates as instrumental variables

depository institution competition in the deregulated environment the case of the large credit union the purpose of this paper is to analyse the effect of deregulation and enhanced competition on the costs and performance of large credit unions using a sample of large credit unions over the period 1979 through to 1985 we find no evidence that credit unions average costs have risen nor do we find evidence that credit unions have suffered adverse changes in operating margins large credit unions not only compete with other depository institutions but appear to have responded well in the newly competitive environment

debt restructuring and economic recovery analysing the argentine swap when argentine sovereign default in december 2001 led to a collapse of the peso the burden of dollar debt became demonstrably unsustainable but it was not clear what restructuring was feasible nor when eventually in 2005 after a delay of more than three years a super majority of creditors accepted a swap that essentially involved the pesification of dollar liabilities with the imf not playing its customary role in arranging a swap we consider whether a bilateral bargaining approach can help explain the final settlement and the delay in achieving it we find that the swap broadly corresponds to a bargaining outcome where substantial delay occurred for both political and economic reasons even after political legitimacy was assured by general elections negotiators seeking a sustainable outcome at a time of deep recession profound currency under valuation and high sovereign spreads realised it was better to wait before settling other factors discussed include the definition of sustainability criteria the effect of inter creditor conflict and the role of third parties in promoting good faith bargaining we suggest that while these issues need further investigation there are institutional changes that could make them less problematic

have financial statements lost their relevance the authors explore the concern that financial statements no longer have the same relevance to investors that they had in the past they test for value relevance by measuring the total return that could have been earned from prior knowledge of financial statement information and by examining the explanatory power of accounting information on market values and annual market adjusted returns both analyses are applied to a broad sample of exchange listed and nasdaq firms for the 1952 94 period the authors find mixed evidence on value relevance of financial statement reporting during the test period

the role of multilateral institutions in the market for sovereign debt creditor country governments have an interest in avoiding defaults by sovereign debtors because default sanctions may be costly to their citizens as a result a standard bargaining model predicts that debtors do not repay in equilibrium even if the threat of sanctions is credible on the part of the banks by contracting with a third party such as a multilateral institution with some degree of independence creditor country governments can precommit not to intervene in equilibrium when debt renegotiation occurs the sovereign receives a subsidy from the multilateral agency the model is used to interpret recent debt reduction operations

an analysis of the impact of interest rate ceilings the first aim of this study is to estimate the interest rates paid for motor vehicle loans the second aim is to identify those potential borrowers most likely to be rationed out of the market by the imposition of rate ceilings rate ceilings constrain the rates paid by successful loan applicants to be no greater than the applicable ceiling level these constraints are dealt with by treating the interest rate paid as a variable truncated at the ceiling level assuming the dependent variable is truncated normal consistent estimates are obtained by employing the maximum likelihood method of hausman and wise