Exploring Determinants of Firms’ Participation in the New Offshore Renminbi Debt Securities Market

Once in a while a major financial innovation creates a new product that changes the landscape for firms that adopt it. For example, junk bonds enabled leveraged buyouts, securitization stimulated off balance sheet growth in banks, and CDS offered pure trading in credit risk. New RMB financial products emerging as China opens its capital account provide a similar change to the landscape for firms and investors engaged with China or those using RMB as a vehicle currency. Uptake of the new products has been rapid, and in this paper we use the data from the Hong Kong Monetary Authority for offshore RMB bonds to explore that process. We are mostly interested in what determines firms’ participation decision in this market. We allow for changes in regulation, market depth, parallel market developments and changes in the advantages of participation using interest differentials to explain what influences firms’ and investors’ choices to enter the market and find that they all have an influence on the decision to participate in this new financial market

Forecasting US bond default ratings allowing for previous and initial state dependence in an ordered probit model

In this paper, we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models based on momentum, drift and ageing and compare them against alternatives that take into account the initial rating of the firm and its previous actual rating. Using data on US bond issuing firms rated by Fitch over the years 2000 to 2007 we compare the performance of these models in predicting the rating in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that initial and previous states have a substantial influence on rating prediction.Credit ratings, probit, state dependence

Monetary Policy, Corporate Financial Composition and Real Activity

This paper addresses two fundamental questions about monetary policy, credit conditions and corporate activity. First, can we relate differences in the composition of debt between tight and loose periods of monetary policy to firm characteristics like size, age, indebtedness or risk? Second, do differences in companies’ financial compositions matter for real activity of firms such as inventory and employment growth? The paper offers some evidence from firms in the UK manufacturing sector which suggests the composition of debt differs considerably with characteristics such as size, age, debt and risk, it also shows a significant effect from financial composition and cash flow to inventory and employment growth.Monetary Policy, Inventory Investment, Employment, Firm Type

Modelling the Persistence of Credit Ratings When Firms Face Financial Constraints, Recessions and Credit Crunches

Making accurate predictions of corporate credit ratings is a crucial issue to both investors and rating agencies. Recent events have drawn attention to ratings agencies methods. In this paper we investigate the determinants of credit ratings as a function of financial variables; we then consider whether there is persistence in ratings for different types of .rms in recessions and credit crunches. Using data on US Firms rated by Fitch we find substantial evidence of persistence in ratings, and great improvements in prediction as a result. Credit ratings vary for firms facing binding/non-binding financing constraints but do not vary for in recessions/credit crunches and other periods therefore agencies rate "through the cycle".

Household Credit and Probability Forecasts of Financial Distress in the United Kingdom

The growth of unsecured household credit relative to income has been marked in recent years and many observers have questioned whether it is sustainable. This paper develops a theory-based empirical model of equilibrium household consumption and credit. The equilibrium relationships are embedded within a vector-autoregressive model that can accommodate complex dynamics with a coherent long-run structure. We define the events associated with financial distress and describe probability forecasting methods that can be applied to the model to predict the likely occurence of distress events. The analysis is illustrated using unsecured credit market data for the UK.Financial Distress, Probability Forecasts, Household Spending and Credit.

Corporate investment and cash flow sensitivity: what drives the relationship?

The excess sensitivity of investment to cash flow has been demonstrated in numerous studies. Recent research has identified differences in the degree of sensitivity across countries, which it ascribes to the nature of the lender-borrower relationship in the financial systems of those countries. In this paper we offer new methods and results to determine whether differences are associated with structural explanations such as the nature of the financial system and industrial composition, or due to other firm-specific determinants such as size or creditworthiness. Unlike previous research we are able to systematically control for competing explanations in our data from more than one country and thereby isolate what drives the relationship. We find that creditworthiness is the main driving force of cash flow sensitivity. JEL Classification: E22, D92cash flow sensitivity, corporate investment, cross-country investment studies

What Effect has Bond Market Development in Asia had on the Issue of Corporate Bonds

This paper investigates the determinants of the firm's decision to issue corporate bonds in emerging Asian economies, using a novel database covering the period 1995 to 2004. We use comparable micro level panel data for 4 countries - Indonesia, Korea, Malaysia and Thailand - to explore the influence of firms' size and growth prospects, financial health and indicators of bond market development on the decision to issue corporate bonds. Our results show that the likelihood of bond issuance increases with size and growth prospects and with creditworthiness in all countries; there is evidence of firm level heterogeneity across firm size classes. Importantly, there is no effect from bond market development on the likelihood of bond issuance. We conclude that the benefits of bond market development are yet to spillover to corporate bond markets.Bond financing, financial variables, development, emerging Asian markets.

Evidence on the external finance premium from the US and emerging Asian corporate bond markets

Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds especially for the emerging Asian market. In this paper we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for the United States, China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995-2005 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity we show that financial variables appear to be both statistically and quantitatively more important in the Asian market than in the US. Finally, the premium is more sensitive to firm-level variables during credit crunches, recessions and sudden stops than other periods, with stronger effects for the Asian bond market.Financing Constraints, External Finance Premium, Asian Bond Markets.

A Taste for Dim Sum: Analysing the Financial Diffusion in the New Offshore Renminbi Debt Securities

Periodically a major financial innovation creates a new product class that changes the financial landscape. Examples include junk bonds that enabled leveraged buyouts, securitization that stimulated off balance sheet growth in banks, and credit default swaps that offered pure trading in credit risk. Now new renminbi financial products are emerging as China opens its capital account, providing new opportunities for innovation in corporate finance that will promote financial stability and sustainable growth in China. This study illustrates the rapid growth in the use of these new products by Chinese and overseas firms. We use diffusion models to explore how participation in this market is influenced by greater depth and liquidity of the market, lower costs of issuance and greater expected appreciation of the renminbi against the US dollar. Understanding these offshore developments will help support smoother innovation in the onshore corporate bond market