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Suresh M Sundaresan - One of the best experts on this subject based on the ideXlab platform.
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investment under uncertainty with strategic Debt Service
The American Economic Review, 2007Co-Authors: Suresh M Sundaresan, Neng WangAbstract:The presence of a well designed bankruptcy code is an important part of the financialarchitecture in developed economies. By allowing the creditors to seize the assets of theborrowers who fail to make contractual payments, the code generates beneficial ex ante effectson Debt capacity and firm value. By giving the borrowers options to renegotiate their Debtobligations and seek bankruptcy protection, the code increases the likelihood that borrowersmay avoid inefficient ex post liquidation. As Hart (1999) notes, the code should balanceex ante firm value maximization with ex post efficiency. The bankruptcy codes in differentcountries weight this tradeoff differently and hence vary in terms of the distribution of rightsand powers between borrowers and lenders.In this paper, we provide an inter-temporal framework to examine how the creditors’liquidation rights and the distribution of ex post bargaining powers influence the firm’s in-vestment and financing decisions, and affect ex ante firm value. We show that strongerequityholders’ bargaining power lowers Debt capacity, reduces firm value, and discouragesgrowth option exercising. Our calibration suggests that the quantitative effects of ex poststrategic renegotiation on ex ante firm value may be large.Our paper provides an attempt to integrate financial architecture into the theory of in-vestment (growth option exercising), by building on two strands of literature: investment andDebt pricing. We extend the real options approach to investment, pioneered by McDonaldand Siegel (1986) and Brennan and Schwartz (1985), to allow for capital structure decisionsunder strategic Debt Service. We also draw insights from corporate Debt pricing/capital struc-ture literature, which focuses on leverage and security pricing after investment has alreadybeen made (Merton (1974), Black and Cox (1976), and Leland (1994)). Our paper bridgesthe gap between these two strands of literature by characterizing the optimal investment andfinancing decisions, and the option value of waiting in closed form. We show that the inter-action between financing and investment decisions in the presence of strategic Debt Servicegenerates new insights and also quantitatively important effects on ex ante firm value.
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Debt valuation renegotiation and optimal dividend policy
Review of Financial Studies, 2000Co-Authors: Suresh M SundaresanAbstract:The valuation of Debt and equity, reorganization boundaries, and firm's optimal dividend policies are studied in a framework where we model strategic interactions between Debt holders and equity holders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: Debt-equity swaps and strategic Debt Service resulting from negotiated Debt Service reductions. We study the effects of bond covenants on payout policies and distinguish liquidity-induced defaults from strategic defaults. We derive optimal equity issuance and payout policies. The Debt capacity of the firm and the optimal capital structure are characterized. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Nicholas M. Odhiambo - One of the best experts on this subject based on the ideXlab platform.
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Public Debt Service in South Africa and Its Impact on Economic Growth: An Empirical Test:
The Review of Black Political Economy, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:By applying the autoregressive distributed lag approach, this article investigates the dynamic impact of public Debt Service on economic growth in South Africa, covering the period from 1970 to 201...
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Causality Between Public Debt, Public Debt Service and Economic Growth in an Emerging Economy
Studia Universitatis Babes-Bolyai Oeconomica, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This paper explores the causality between public Debt, public Debt Service and economic growth in South Africa covering the period 1970 – 2017. The study employs the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and the multivariate Granger-causality test. The empirical results indicate that there is unidirectional causality from economic growth to public Debt, but only in the short run. However, the study fails to establish any causality between public Debt Service and economic growth, both in the short run and long run. In line with the empirical evidence, the study concludes that it is economic growth that drives public Debt in South Africa, and that the causal relationship between public Debt and economic growth is sensitive to the timeframe considered. The paper recommends policymakers in South Africa to consider growth-enhancing policies in the short run, since poor economic performances may lead to high public Debt levels.
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The impact of Debt Service on economic growth:Empirical evidence from Zambia
International Journal of Revenue Management, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This study contributes to existing public Debt Service-economic growth literature by rendering empirical evidence from Zambia using time-series method covering the period from 1970 to 2017. The study applied the autoregressive distributed lag (ARDL) bounds analysis technique which permits the simultaneous estimation of the long- and short-run model parameters. In overall terms, the empirical results reveal that the impact of government Debt Service on economic growth in Zambia is time-variant. Whereas the neutrality of public Debt Service on economic growth is confirmed in the long run, in the short run the relationship is negative. To achieve macroeconomic stability and realise sustainable economic growth rates, the paper recommends the Zambian government to, among other things, undertake active fiscal consolidation to ensure that Debt repayments do not cause excessive budget overruns and are not financed from new Debt; and continuously improve public Debt management strategies and policies to smoothen government Debt redemption profile.
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Government Debt, government Debt Service and economic growth nexus in Zambia: a multivariate analysis
Cogent Economics & Finance, 2019Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This paper explores the causal relationships between public Debt and economic growth, and between public Debt Service and economic growth in Zambia for the period from 1970 to 2017. Unlike previous...
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A Critical Review of the Dynamics of Government Debt Servicing in Zimbabwe
Studia Universitatis „Vasile Goldis” Arad – Economics Series, 2018Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This paper provides a conceptual analysis of government Debt servicing in Zimbabwe from 1980 to 2015. The mounting Debt burden arising largely from nonconcessionary foreign loans since the 1980s, and the economic hardships that characterise the country beginning the late 1990s, caused dreadful public Debt servicing challenges. Thus, the paper discusses the public Debt Service reforms and policies; trends; and problems in Zimbabwe over the review period. In the paper, it was identified that between 1983 and 1997, the government’s Debt servicing costs were growing exponentially, resulting in liquidity challenges. However, between 1998 and 2015, the country had plunged into public Debt Service overhang, with public Debt servicing liabilities exceeding the country’s foreign exchange earnings. Notwithstanding the various public Debt servicing reforms to boost domestic revenues, Zimbabwe, as many other developing countries, still faces a number of Debt servicing problems. Among others, these include: high government Debt, low industrial and export competitiveness, narrow revenue base and subdued investor confidence. The paper recommends the government of Zimbabwe to undertake the following measures, among others, aimed at either boosting or expanding the revenue base: (i) improving tax enforcements; (ii) mobilising the informal sector; and (iii) expanding the productive capacity of public entities.
Talknice Saungweme - One of the best experts on this subject based on the ideXlab platform.
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Public Debt Service in South Africa and Its Impact on Economic Growth: An Empirical Test:
The Review of Black Political Economy, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:By applying the autoregressive distributed lag approach, this article investigates the dynamic impact of public Debt Service on economic growth in South Africa, covering the period from 1970 to 201...
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Causality Between Public Debt, Public Debt Service and Economic Growth in an Emerging Economy
Studia Universitatis Babes-Bolyai Oeconomica, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This paper explores the causality between public Debt, public Debt Service and economic growth in South Africa covering the period 1970 – 2017. The study employs the autoregressive distributed lag (ARDL) bounds testing approach to cointegration and the multivariate Granger-causality test. The empirical results indicate that there is unidirectional causality from economic growth to public Debt, but only in the short run. However, the study fails to establish any causality between public Debt Service and economic growth, both in the short run and long run. In line with the empirical evidence, the study concludes that it is economic growth that drives public Debt in South Africa, and that the causal relationship between public Debt and economic growth is sensitive to the timeframe considered. The paper recommends policymakers in South Africa to consider growth-enhancing policies in the short run, since poor economic performances may lead to high public Debt levels.
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The impact of Debt Service on economic growth:Empirical evidence from Zambia
International Journal of Revenue Management, 2020Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This study contributes to existing public Debt Service-economic growth literature by rendering empirical evidence from Zambia using time-series method covering the period from 1970 to 2017. The study applied the autoregressive distributed lag (ARDL) bounds analysis technique which permits the simultaneous estimation of the long- and short-run model parameters. In overall terms, the empirical results reveal that the impact of government Debt Service on economic growth in Zambia is time-variant. Whereas the neutrality of public Debt Service on economic growth is confirmed in the long run, in the short run the relationship is negative. To achieve macroeconomic stability and realise sustainable economic growth rates, the paper recommends the Zambian government to, among other things, undertake active fiscal consolidation to ensure that Debt repayments do not cause excessive budget overruns and are not financed from new Debt; and continuously improve public Debt management strategies and policies to smoothen government Debt redemption profile.
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Causality between public Debt, public Debt Service and economic growth: Evidence from South Africa
2019Co-Authors: Talknice SaungwemeAbstract:This paper explores the causality between public Debt and economic growth, and betweenpublic Debt Service and economic growth in South Africa covering the period 1970 ? 2017. Thestudy employed the autoregressive distributed lag (ARDL) bounds testing approach tocointegration and the multivariate Granger-causality test. The empirical results indicate thatthere is unidirectional causality from economic growth to public Debt, but only in the short run.However, the study fails to establish any causality between public Debt Service and economicgrowth, both in the short run and in the long run. In line with the empirical evidence, the studyconcludes that it is economic growth that drives public Debt in South Africa, and that the causalrelationship between public Debt and economic growth is sensitive to the time frameconsidered. The paper recommends that South Africa should prioritise the implementation ofappropriate policies and strategies that could drive economic growth in order to uphold asustainable public Debt level.
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Government Debt, government Debt Service and economic growth nexus in Zambia: a multivariate analysis
Cogent Economics & Finance, 2019Co-Authors: Talknice Saungweme, Nicholas M. OdhiamboAbstract:This paper explores the causal relationships between public Debt and economic growth, and between public Debt Service and economic growth in Zambia for the period from 1970 to 2017. Unlike previous...
Neng Wang - One of the best experts on this subject based on the ideXlab platform.
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investment under uncertainty with strategic Debt Service
The American Economic Review, 2007Co-Authors: Suresh M Sundaresan, Neng WangAbstract:The presence of a well designed bankruptcy code is an important part of the financialarchitecture in developed economies. By allowing the creditors to seize the assets of theborrowers who fail to make contractual payments, the code generates beneficial ex ante effectson Debt capacity and firm value. By giving the borrowers options to renegotiate their Debtobligations and seek bankruptcy protection, the code increases the likelihood that borrowersmay avoid inefficient ex post liquidation. As Hart (1999) notes, the code should balanceex ante firm value maximization with ex post efficiency. The bankruptcy codes in differentcountries weight this tradeoff differently and hence vary in terms of the distribution of rightsand powers between borrowers and lenders.In this paper, we provide an inter-temporal framework to examine how the creditors’liquidation rights and the distribution of ex post bargaining powers influence the firm’s in-vestment and financing decisions, and affect ex ante firm value. We show that strongerequityholders’ bargaining power lowers Debt capacity, reduces firm value, and discouragesgrowth option exercising. Our calibration suggests that the quantitative effects of ex poststrategic renegotiation on ex ante firm value may be large.Our paper provides an attempt to integrate financial architecture into the theory of in-vestment (growth option exercising), by building on two strands of literature: investment andDebt pricing. We extend the real options approach to investment, pioneered by McDonaldand Siegel (1986) and Brennan and Schwartz (1985), to allow for capital structure decisionsunder strategic Debt Service. We also draw insights from corporate Debt pricing/capital struc-ture literature, which focuses on leverage and security pricing after investment has alreadybeen made (Merton (1974), Black and Cox (1976), and Leland (1994)). Our paper bridgesthe gap between these two strands of literature by characterizing the optimal investment andfinancing decisions, and the option value of waiting in closed form. We show that the inter-action between financing and investment decisions in the presence of strategic Debt Servicegenerates new insights and also quantitatively important effects on ex ante firm value.
Rangarajan K. Sundaram - One of the best experts on this subject based on the ideXlab platform.
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When does Strategic Debt-Service Matter?
Economic Theory, 2005Co-Authors: Viral Acharya, Jing-zhi Huang, Marti Subrahmanyam, Rangarajan K. SundaramAbstract:Strategic Debt-Service, Optimal cash management, Liquidity defaults, Strategic defaults, Yield spreads, G13, G33, G35,
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When does Strategic Debt-Service Matter?
SSRN Electronic Journal, 2002Co-Authors: Viral V. Acharya, Jing-zhi Huang, Marti G. Subrahmanyam, Rangarajan K. SundaramAbstract:Recent work in corporate finance has suggested that strategic Debt-Service by equity-holders works to lower Debt values and raise yield spreads substantially. We show that this is not quite correct. With optimal cash management, defaults occassioned by deliberate underperformance (strategic defaults) and those forced by inadequate cash (liquidity defaults) work as substitutes: allowing for strategic Debt-Service leads to a decline in the equilibrium likelihood of liquidity defaults. In some cases, this decline is sufficiently sharp that equilibrium Debt values actually increase and yield spreads decline. We provide an intuitive explanation for these results in terms of an interaction of optionalities
