Research articles for the 2019-02-22
An Empirical Analysis of the Factors that Influence Infrastructure Project Financing by Banks in Select Asian Economies
SSRN
A recent Asian Development Bank publication estimates the large infrastructure financing requirement in Asia for the period 2016â€"2030, which establishes the strong need to encourage private sector participation to meet investment requirements. This paper analyzes a critical aspect of expanding private finance to infrastructure by examining the role of bank lending to public private partnership (PPP) projects through the project finance modality. The key empirical results suggest that project financing by banks to infrastructure PPP projects is still in its infancy in several Asian markets, and banks are guided more by macroeconomic factors and by the strength of their balance sheets. The key policy implications to unlock bank finance for infrastructure PPP projects lie in reducing macroeconomic risk factors and having well-capitalized banks. The latter assumes significance, given the higher capital requirements that banks are expected to fulfill, following the adoption of Basel III capital standards.
SSRN
A recent Asian Development Bank publication estimates the large infrastructure financing requirement in Asia for the period 2016â€"2030, which establishes the strong need to encourage private sector participation to meet investment requirements. This paper analyzes a critical aspect of expanding private finance to infrastructure by examining the role of bank lending to public private partnership (PPP) projects through the project finance modality. The key empirical results suggest that project financing by banks to infrastructure PPP projects is still in its infancy in several Asian markets, and banks are guided more by macroeconomic factors and by the strength of their balance sheets. The key policy implications to unlock bank finance for infrastructure PPP projects lie in reducing macroeconomic risk factors and having well-capitalized banks. The latter assumes significance, given the higher capital requirements that banks are expected to fulfill, following the adoption of Basel III capital standards.
Crowdsourcing Financial Information to Change Spending Behavior
SSRN
We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric â€" spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts.
SSRN
We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric â€" spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts.
Determinants of Publicâ€"Private Partnerships in Infrastructure in Asia: Implications for Capital Market Development
SSRN
In this study, we attempt to understand the role of greater access to finance, i.e., stocks, bonds and bank loans, in publicâ€"private partnership (PPP) investment in developing countries. Most developing countries still depend heavily on fiscal financing for infrastructure projects. Our empirical results reconfirm the fact that banks remain the major source of finance for infrastructure projects. The domestic bond market should be further developed to have depth and liquidity enough to provide longterm funding for private sector investors. Interestingly, we find a negative impact of bond market development on PPP investment. A possible interpretation is that financing through government bonds, which dominates bond markets in developing countries, discourages private sector participation by reducing financing access to the corporate bond market. Our evidence underlines the importance of a well-functioning corporate bond market in developing countries, which can offer long-term financing to private sector participation in infrastructure investments.
SSRN
In this study, we attempt to understand the role of greater access to finance, i.e., stocks, bonds and bank loans, in publicâ€"private partnership (PPP) investment in developing countries. Most developing countries still depend heavily on fiscal financing for infrastructure projects. Our empirical results reconfirm the fact that banks remain the major source of finance for infrastructure projects. The domestic bond market should be further developed to have depth and liquidity enough to provide longterm funding for private sector investors. Interestingly, we find a negative impact of bond market development on PPP investment. A possible interpretation is that financing through government bonds, which dominates bond markets in developing countries, discourages private sector participation by reducing financing access to the corporate bond market. Our evidence underlines the importance of a well-functioning corporate bond market in developing countries, which can offer long-term financing to private sector participation in infrastructure investments.
Evidence on the Effect of Financial Distress on Corporate Organizational Structure From a Managerial Qualifications Perspective
SSRN
This paper introduces a managerial skills dimension into analysis of corporate financial distress and corporate restructuring. We use an ordered logit model to examine how manager qualifications affect whether a company declares bankruptcy, is liquidated or reorganized, and how different forms of organizational structure emerge after companies experience distress. The current paper uncovers additional evidence that manager qualifications are important during financial distress. However, we determine that managerial skills are not panacea and beyond a certain limit no talent and skills can save a failing firm from bankruptcy.
SSRN
This paper introduces a managerial skills dimension into analysis of corporate financial distress and corporate restructuring. We use an ordered logit model to examine how manager qualifications affect whether a company declares bankruptcy, is liquidated or reorganized, and how different forms of organizational structure emerge after companies experience distress. The current paper uncovers additional evidence that manager qualifications are important during financial distress. However, we determine that managerial skills are not panacea and beyond a certain limit no talent and skills can save a failing firm from bankruptcy.
Family Business Groups and Economic Development in Southeast Asia
SSRN
Large private enterprises in the ASEAN-5 economies have been, and remain, dominated by firms that share four common characteristics: (1) their ownership and control are concentrated among a handful of prominent business families; (2) most of these families have Chinese origins; (3) each family owns a collection of legally distinct firms that collectively form a business group; and (4) the owning families have formed extensive connections with politicians and bureaucrats. These characteristics reflect how family businesses have responded to the changing political and economic situations in the region over the past century â€" the process that shapes the landscape of the modern corporate sector in the ASEAN-5 economies that we observe today.
SSRN
Large private enterprises in the ASEAN-5 economies have been, and remain, dominated by firms that share four common characteristics: (1) their ownership and control are concentrated among a handful of prominent business families; (2) most of these families have Chinese origins; (3) each family owns a collection of legally distinct firms that collectively form a business group; and (4) the owning families have formed extensive connections with politicians and bureaucrats. These characteristics reflect how family businesses have responded to the changing political and economic situations in the region over the past century â€" the process that shapes the landscape of the modern corporate sector in the ASEAN-5 economies that we observe today.
Household Debt, Corporate Debt, and the Real Economy: Some Empirical Evidence
SSRN
The rapid accumulation of private debt is widely viewed as a major risk to financial and economic stability. This paper systematically and comprehensively assesses the effect of private debt buildup on economic growth. In the spirit of Mian, Sufi, and Verner (2017) that separately examine the effects of two types of private debt, i.e., household debt and corporate debt, on growth in developed economies, this study specifically provides new evidence on the growthâ€"private debt nexus in both advanced and emerging market economies (EMEs). Moreover, we construct financial peaks in terms of the speed of debt accumulation rather than crisis dates and find that in both advanced and EMEs, corporate debt buildups cause more financial peaks than household debt buildups. Further, corporate debt-induced financial recessions inflict a bigger damage on output than household debt-induced financial recessions in EMEs. Overall, our evidence suggests that policy makers would do well to closely monitor not only household debt but also corporate debt.
SSRN
The rapid accumulation of private debt is widely viewed as a major risk to financial and economic stability. This paper systematically and comprehensively assesses the effect of private debt buildup on economic growth. In the spirit of Mian, Sufi, and Verner (2017) that separately examine the effects of two types of private debt, i.e., household debt and corporate debt, on growth in developed economies, this study specifically provides new evidence on the growthâ€"private debt nexus in both advanced and emerging market economies (EMEs). Moreover, we construct financial peaks in terms of the speed of debt accumulation rather than crisis dates and find that in both advanced and EMEs, corporate debt buildups cause more financial peaks than household debt buildups. Further, corporate debt-induced financial recessions inflict a bigger damage on output than household debt-induced financial recessions in EMEs. Overall, our evidence suggests that policy makers would do well to closely monitor not only household debt but also corporate debt.
Local Governments, In-Kind Transfers, and Economic Inequality
SSRN
We examine how in-kind transfers provided by local governments affect economic inequality. The allocation of in-kind transfers to households and the adjustment for differences in needs are derived from a model of local government spending behavior. The model distinguishes between fixed and variable costs in production as well as mandatory programmatic spending components versus discretionary spending on different service sectors and target groups. To estimate the model, we combine Norwegian data from municipal accounts and administrative registers for the period 1982- 2013. We find that economic inequality is considerably lower when taking in-kind transfers into account. While the poor benefits from receiving a relatively large share of public services, the equalizing effect of in-kind transfers tends to be smaller than the equalizing contribution from public cash transfers. When examining the time trends in inequality, we find that local governments attenuated the growth in cash income inequality by re-allocating in-kind transfers to low-income families. This reduction in inequality is mostly due to changes in spending priorities across service sectors and target groups, whilst the contribution from re-allocation of resources across municipalities is much smaller.
SSRN
We examine how in-kind transfers provided by local governments affect economic inequality. The allocation of in-kind transfers to households and the adjustment for differences in needs are derived from a model of local government spending behavior. The model distinguishes between fixed and variable costs in production as well as mandatory programmatic spending components versus discretionary spending on different service sectors and target groups. To estimate the model, we combine Norwegian data from municipal accounts and administrative registers for the period 1982- 2013. We find that economic inequality is considerably lower when taking in-kind transfers into account. While the poor benefits from receiving a relatively large share of public services, the equalizing effect of in-kind transfers tends to be smaller than the equalizing contribution from public cash transfers. When examining the time trends in inequality, we find that local governments attenuated the growth in cash income inequality by re-allocating in-kind transfers to low-income families. This reduction in inequality is mostly due to changes in spending priorities across service sectors and target groups, whilst the contribution from re-allocation of resources across municipalities is much smaller.
Real Insider Trading
SSRN
Government officials and academics offer starkly different portraits of insider trading enforcement. In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. Unfortunately, this debate has, so far, been based mostly on anecdote and conjecture rather than empirical evidence. This article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess how enforcers actually operationalize insider trading doctrine. The cases enforcement authorities bring are shaped by a complex and cross-cutting set of institutional and individual incentives, cognitive biases, legal requirements, the history of failed enforcement efforts, and the way in which the agency and the self-regulatory organizations deploy their investigatory resources. SEC enforcement is dominated by small stakes, opportunistic trading by mid-level employees and their friends and family, most often involving M&A transactions. Those cases settle quickly, half within 30 days of filing. Criminal enforcement is generally reserved for more serious cases, measured by, among other things, the type of defendant, the size of the insider trading network, and the profits earned. In both settings, there is little evidence that enforcers are systematically stretching the boundaries of insider trading doctrine, suggesting that there is little need for more precise statutory language to curb enforcement overreach.
SSRN
Government officials and academics offer starkly different portraits of insider trading enforcement. In popular rhetoric, insider trading cases are about leveling the playing field between elite market participants and ordinary investors. Academic critiques vary. Some depict an untethered insider trading doctrine that enforcers use to expand their power and enhance their discretion. Others see enforcers beset with agency cost problems who bring predominantly simple, easily resolved cases to create the veneer of vigorous enforcement. Unfortunately, this debate has, so far, been based mostly on anecdote and conjecture rather than empirical evidence. This article addresses that gap by collecting extensive data on 465 individual defendants in civil, criminal, and administrative actions to assess how enforcers actually operationalize insider trading doctrine. The cases enforcement authorities bring are shaped by a complex and cross-cutting set of institutional and individual incentives, cognitive biases, legal requirements, the history of failed enforcement efforts, and the way in which the agency and the self-regulatory organizations deploy their investigatory resources. SEC enforcement is dominated by small stakes, opportunistic trading by mid-level employees and their friends and family, most often involving M&A transactions. Those cases settle quickly, half within 30 days of filing. Criminal enforcement is generally reserved for more serious cases, measured by, among other things, the type of defendant, the size of the insider trading network, and the profits earned. In both settings, there is little evidence that enforcers are systematically stretching the boundaries of insider trading doctrine, suggesting that there is little need for more precise statutory language to curb enforcement overreach.
Risk Mitigation and Sovereign Guarantees for Publicâ€"Private Partnerships in Developing Economies
SSRN
Publicâ€"private partnerships (PPPs) face a range of challenges in developed economies, such as appropriate risk sharing, attracting the right sponsors, and ensuring quality of service. As a large percentage of ADB’s developing member countries are considered risky borrowers by international standards, sovereign risks play an important role in predicting the number of PPPs as well as the size of investment commitments. To catalyze PPPs in developing economies with higher risk ratings, sovereign risk mitigation is often needed. This article explores how country and sovereign risks deter private investors, solutions provided by multilateral development banks to reduce these risks, and policy implications for employing these solutions.
SSRN
Publicâ€"private partnerships (PPPs) face a range of challenges in developed economies, such as appropriate risk sharing, attracting the right sponsors, and ensuring quality of service. As a large percentage of ADB’s developing member countries are considered risky borrowers by international standards, sovereign risks play an important role in predicting the number of PPPs as well as the size of investment commitments. To catalyze PPPs in developing economies with higher risk ratings, sovereign risk mitigation is often needed. This article explores how country and sovereign risks deter private investors, solutions provided by multilateral development banks to reduce these risks, and policy implications for employing these solutions.
Sovereign Bonds Since Waterloo
SSRN
This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.
SSRN
This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.
The Changing Network of Financial Market Linkages: The Asian Experience
SSRN
Recent international financial crises highlight the advantages of understanding the global financial system as a network of economies in which cross-border financial linkages are fundamental to the spread of systemic risk. We investigate the changing network of financial markets for six periods from 1995â€"2016, constructing a network that captures the concepts of the direction of links between markets, the significance of these links, and their strength. Emphasis is placed on the transition of the networks before and after the Asian financial crisis of 1997â€"1998 and the global financial crisis of 2008â€"2009. The analysis demonstrates the increase in interconnectedness during periods of stress and the fall in the number of links in post-crisis periods. At the same time, the results reveal a general deepening of the connections of the Asian market with the rest of the world over the past 2 decades. They also suggest that many of these markets have transitioned from being primarily linked to developed non-Asian markets through key bridge markets (such as Hong Kong, China) to developing stronger direct links with these external markets, highlighting the importance of key geographical nodes in market development.
SSRN
Recent international financial crises highlight the advantages of understanding the global financial system as a network of economies in which cross-border financial linkages are fundamental to the spread of systemic risk. We investigate the changing network of financial markets for six periods from 1995â€"2016, constructing a network that captures the concepts of the direction of links between markets, the significance of these links, and their strength. Emphasis is placed on the transition of the networks before and after the Asian financial crisis of 1997â€"1998 and the global financial crisis of 2008â€"2009. The analysis demonstrates the increase in interconnectedness during periods of stress and the fall in the number of links in post-crisis periods. At the same time, the results reveal a general deepening of the connections of the Asian market with the rest of the world over the past 2 decades. They also suggest that many of these markets have transitioned from being primarily linked to developed non-Asian markets through key bridge markets (such as Hong Kong, China) to developing stronger direct links with these external markets, highlighting the importance of key geographical nodes in market development.
