Sovereign debt buybacks as a signal of creditworthiness

To solve the puzzle of attitudes toward debt buybacks, the authors use a model that combines considerations of debt overhang with the possibility of asymmetrical information between debtor countries and their creditors. In this environment, a debt overhang may create disincentives for a country to undertake a worthwile investment, and debt relief may induce the country to invest and to increase its output, raising future debt repayments. The authors show that debt buybacks can credibly reveal a debtor country's willingness to invest and to repay in the future when offered relief today. In equilibrium, countries that buy back debt get debt relief and those that do not buyback debt do not get debt relief. The authors tested and failed to reject two implications of their model : 1) that banks grant debt relief to countries that have a swap program in place, and 2) that the secondary market price of country debt, conditional on a swap, is higher than the debt price, conditional on no swap.Economic Theory&Research,Strategic Debt Management,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Value of Latent Information: Alternative Event Study Methods.

This paper presents an econometric model to value latent information underlying corporate events. This model computes the market's inference of the value of latent information from the probability of an event, conditional on firm-specific, preevent information. It provides a convenient framework for testing significance of preevent information variables, such as accounting attributes and lagged stock return. Simulations show that this mode l, when applied to both event and preevent period data, can decrease th e incidence of bias in event studies. If restricted to only event peri od data, this model reduces to a truncated regression and does not perf orm as well as standard procedures. Copyright 1993 by American Finance Association.

A Generalized Econometric Model and Tests of a Signalling Hypothesis with Two Discrete Signals.

To test the major prediction of a signalling hypothesis-that the market price is m onotonic in the signal-the price response to the signal must be measu red. Since a signal is an outcome of a rational decision rule of the signaller, the market can infer the true type of the signaller from t he signal. This necessitates estimation of the price response to the signal, conditional on the rational decision rule. Thus, the empirica l models (e.g., event studies in corporate finance) that estimate the market price responses to signals without conditioning on the ration al decision rules are misspecified if viewed as tests of the predicti on of a signalling hypothesis. This paper builds a generalized econom etric model with two possible discrete signals, derives the rational decision rules, presents a simple estimator of the price response to a signal, and illustrates its use in testing a recently expounded hyp othesis that firms signal their true value by forcing or not forcing an outstanding convertible bond. Copyright 1988 by American Finance Association.