Corporate Money Demand

We document a hump-shaped relation between corporate cash and both real and nominal interest rates in both aggregate and firm-level data. We rationalize this result in a model where firms finance investment with cash and risky debt. The risky rate rises endogenously with the risk-free rate, spurring precautionary cash demand. Simultaneously, foregone interest lowers cash demand. The first mechanism dominates at low interest rates, and the second at high interest rates. The model matches several data moments and reproduces a nonmonotonic cash–interest relation. This nonmonotonicity implies that interest rates are unlikely to be behind the recent rise in corporate cash.

How risky debt became ordinary: A practice theoretical approach

Existing research on how consumers experience increasing debt as normal focuses on the shifting moral meanings surrounding debt. Examining rapid mortgage debt escalation in post-socialist Hungary, we propose a different approach. Using practice theory, we identify credit use as ‘ordinary consumption’: a non-expressive practice which enables other, meaningful practices; akin to energy use. Like energy, credit is channelled by background infrastructures, such as mortgage instruments. We find that mortgage debt grew and became ‘naturalized’ through the co-evolution of practices associated with a ‘normal life’ centred on the home on the one hand, and of available mortgage instruments on the other. This process did not change what debt means but stripped its meanings, making debt increasingly unreflected and invisible. We argue that this invisibility is not a natural characteristic of mortgages but a contested quality. High-risk mortgages became invisible through particular selling devices and discourses that positioned mortgages as ‘expert goods’, to be preselected and installed by qualified advisers. Emphasising the socio-material structuring of this process, we conclude by integrating the meaning-laden and unreflected credit practices into a new theoretical framework, as contingent qualities of credit consumption.

The Impact of Financial Leverage on Shareholders’ Systematic Risk

This paper tests the degree to which a sustainable relationship exists between financial leverage and the systematic risk of shareholders under the following capital market imperfections: corporate and personal taxes as well as risky debt and bankruptcy costs. This beta-leverage relationship has not yet been examined empirically in prior studies nor compared with the theoretical parameter values implied by well-known formulations in the literature. Using data from publicly traded American industrial firms, we found that risky debt models, rather than their corresponding risk free debt models, are more sustainable and appropriate for describing the link between equity beta and financial leverage. Our findings imply that estimating betas or unlevering betas based on risk free debt models might lead to unsustainable and inaccurate estimates of key corporate parameters such as the cost of capital, and may consequently lead to inappropriate capital budgeting decisions. In this respect, the results of this study might have consequences to the recently growing area of sustainable finance in the sense that investment decisions made by different bodies and institutions in the country are more consistent with market imperfections that exist in the economy. In other words, our findings can be in line with a sustainable financial marketplace that contributes to the economic efficiency in the long run and can be related to social well-being.

Banks’ Risk Dynamics and Distance to Default

We adapt structural models of default risk to take into account the special nature of bank assets. The usual assumption of lognormally distributed asset values is not appropriate for banks. Typical bank assets are risky debt claims with concave payoffs. Because of the payoff nonlinearity, bank asset volatility rises following negative shocks to borrower asset values. As a result, standard structural models with constant asset volatility can severely understate banks’ default risk in good times when asset values are high. Additionally, bank equity return volatility is much more sensitive to negative shocks to asset values than in standard structural models.

Liquidity hedging with futures and forward contracts

Purpose This paper aims to develop hedging strategies using both futures and forward contracts and issuing risky debt when financially constrained firms are forced to operate in long horizon. Design/methodology/approach The authors present a model for developing hedging strategies using both futures and forward contracts and issuing risky debt. A theoretical model employing stochastic differential equations for forward hedging is illustrated with a numerical example over parameter values consistent with the literature. Findings A financially constrained firm with limited cash balance must hedge its liquidity with both future and forward contracts and issue risky debt to support its long-term operations. The firm can issue a minimal amount of risky debt by adding forward contracts into hedging and can increase its value higher than that when hedging with only futures contracts. We show numerically that hedging with both futures and forward contracts allows the firm to issue minimal risky debt in increasing its firm value. Practical implications When Metallgesellschaft nearly collapsed in 1993, it offered long-term forward contracts to its customers and attempted to hedge its risk by rolling over series of short-term futures contract. It created the situation of inherent mismatch in maturity structure. A financially constrained firm operating in a long horizon appears to commit its liquidity as long-term forward contracts, which cannot be fully hedged with series of futures contacts. The firm should hedge its liquidity with both futures and forward contracts and avoid liquidation with deadweight costs in its long-term operation. Originality/value This is the first study examining hedging strategies with both futures and forward contracts.

THE CREDIT RISK DYNAMICS OF INTERNATIONAL BONDS: THE INDONESIAN CASE

The objective of this paper is to test how market-determined local-, global- and USbasedfactors explain the behaviour of Indonesian credit spreads. Using a specificasset class of bonds issued in the international market by the Indonesian government,this paper provides evidence confirming the importance of major local and globalmacroeconomic variables in pricing risky debt issued by Indonesia. Using US dollar–denominated bonds ranging from shorter- to longer-maturity groups, this studyprovides insights into the role of these determinants in the pricing process. Giventhe implications for pricing and risk management, the evidence from this study isimportant for investors, policymakers, and issuers.