Creditor Rights and Debt Allocation within Multinationals

We analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. We identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. We find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. For intermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire building dencies. Decentralized borrowing is more attractive for companies focussing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems

IAS 23 Borrowing Costs - A Closer Look

The International Accounting Standards Committee issued the the International Accounting Standard 23, Borrowing Costs. The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. This standard requires the capitalisation of all borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. IAS 23 requires all borrowing costs capitalised as part of the cost of the asset, where the borrowing costs are directly attributable to the acquisition, construction or production of a qualifying asset. This article presents a closer look of the standard (objective, scope, definitions, capitalisation and disclosures).International Accounting Standard; Borrowing Costs; Qualifying Assets; IAS 23; IASC; IASB; FASB

Decentralized Borrowing and Centralized Default

In the past, foreign borrowing by developing countries was comprised almost entirely of government borrowing. Recently, private firms and individuals in developing countries borrow substantially from foreign lenders. It is not clear whether the observed increase in private sector borrowing leads to overborrowing and frequent defaults by governments in developing countries. In this paper, we develop a tractable quantitative model in which private agents decide how much to borrow but the government decides whether to default. The model with decentralized borrowing increases aggregate credit costs and sovereign default risk, and reduces aggregate welfare, relative to a model with centralized borrowing. Private agents do not internalize the effect of their borrowing on economy-wide credit costs and thus would like to borrow more than the socially efficient level. Depending on the severity of default penalties, decentralized borrowing may lead to either too much or too little debt in equilibrium. The introduction of decentralized borrowing substantially improves the model's empirical fit in terms of matching observed debt levels and default rates.Sovereign Default, Sovereign Debt, Private Borrowing, Capital Flows

Borrowing-proofness of the Lindahl rule in Kolm triangle economies

In the context of a simple model of public good provision, we study the requirement on an allocation rule that it be immune to manipulation by augmenting one's endowment through borrowing from the outside world. We call it open-economy borrowing-proofness (Thomson, 2009). We ask whether the Lindahl rule satisfies the property. The answer is yes on both the domain of quasi-linear economies and on the domain of homothetic economies. However, on the classical domain (when preferences are only required to be continuous, monotone, and convex), the answer is negative. We compare the manipulability of the rule through borrowing and its manipulability through withholding. We also asks whether the rule is immune to manipulation by borrowing from a fellow trader, closed-economy borrowing-proofness. We obtain a parallel set of answers. The negative results hold no matter how small the amount borrowed is constrained to be.Public good; Lindahl rule; Kolm triangle; borrowing-proofness; withholding-proofness.

The Reservation Wage under CARA and Limited Borrowing

A continuous-time sequential job search model with savings and CARA preferences is solved analytically without resorting to unlimited borrowing and real-valued consumption. I isolate the effects of limited borrowing and nonnegative consumption as well as risk-aversion on the reservation wage by using a system of ordinary differential equations.labor income risk; wealth-dependent reservation wage; borrowing limit

On the importance of borrowing constraints for house price dynamics

We study how a household borrowing constraint the the form of a down payment requirement affects house price dynamics in an OLG model with standard preferences. We find that in certain situations the borrowing constraint shapes house price dynamics substantially. The importance of the constraint depends very much on whether house price changes are driven by interest rate or aggregate income shocks. Moreover, because of the borrowing constraint, house price dynamics display substantial asymmetries between large positive and large negative income shocks. These results are related to the fact that the share of borrowing-constrained households is different following different shocks.house prices; dynamics; borrowing constraints; down payment constraint

Rising indebtedness and temptation: a welfare analysis

Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing.Equilibrium (Economics)

The Cross-Section of Interbank Rates: A Nonparametric Empirical Investigation

This paper analyzes the distribution of lending and borrowing credit spreads in the European interbank market conditional on main features of banks such as their size, operating currency and nationality. This is done by means of nonparametric kernel estimation methods for the cross-sectional density of interbank funding rates over a large sample of European banks trading in the e-MID market. The analysis is repeated over consecutive non-overlapping periods in order to assess and compare the effect of the factors during crisis and non-crisis periods. We find evidence of important differences between the borrowing and lending segment of the interbank market that are augmented during crises periods. Our results strongly support the existence of a size effect in the borrowing market. Largest banks enjoy the highest lending rates and the lowest borrowing rates. The collapse of Lehman Brothers accentuates the differences in funding conditions. In both borrowing and lending segments, crises are corresponded by high volatilities in daily funding costs. Banks using the Euro currency and in countries not affected by sovereign debt crises are benefited by lower funding costs. Our nonparametric analysis of densities conditional on banks' nationality suggests that distress in the interbank market can serve as an early warning indicator of sovereign risk

Estimates of the demand for US consumer borrowings

This paper explains non-mortgage borrowing by U.S. households with demand-side factors, viz. disposable income, wealth and interest rate. The life cycle hypothesis and a standard two period consumption model are the basis of our theoretical model. We find with the cointegration techniques that current disposable income, past wealth, and interest rate explain consumer borrowing over 50 years.consumer borrowing, disposable income, wealth, interest rates, US economy