Publications

2024
Working Paper

Transitory and Permanent Cash Flow Shocks in Debt Contract Design

By: Le Ma, Anywhere Sikochi and Yajun Xiao

We examine how lenders design contracts to account for transitory and permanent cash flow shocks facing borrowers. We find that volatile transitory cash flow shocks are associated with fewer liquidity covenants, indicating financial flexibility that enables firms to... View Details

Keywords: Debt Covenants; Cash Flow Shocks; Debt Contracting; Likelihood Of Default; Cash Flow; System Shocks

SSRN

1990
Book

Market-Based Debt Reduction for Developing Countries: Principles and Prospects

By: K. Froot, S. Claessens, I. Diwan and P. Krugman

Keywords: Debt Reduction; Chapter 7; Default; Debt Restructuring; Sovereign Debt; Debt Crisis; Borrowing and Debt

Article

CDS Trading and Nonrelationship Lending Dynamics

By: Jung Koo Kang, Christopher Williams and Regina Wittenberg-Moerman

We investigate how credit default swaps (CDSs) affect lenders’ incentives to initiate new lending relationships. We predict that CDSs reduce adverse selection that nonrelationship lead arrangers face when competing for loans. Consistently, we find that a loan is... View Details

Keywords: Credit Default Swaps; CDS Market; Non-relationship Lending; Debt Contracts; Adverse Selection; Lending Monitoring; Cross-selling

February 1989
Article

Buybacks, Exit Bonds, and the Optimality of Debt and Liquidity Relief

By: K. A. Froot

Keywords: Chapter 7; Debt Reduction; Default; Sovereign Debt; Debt Crisis; Debt Restructuring; Borrowing and Debt

March 2005
Article

Sovereign Debt As a Contingent Claim: A Quantitative Approach

By: Laura Alfaro and Fabio Kanczuk

We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide set of parameters, the only equilibrium is one... View Details

Keywords: Sovereign Finance; Borrowing and Debt; Interest Rates; Balance and Stability; Risk and Uncertainty; Risk Management; Mathematical Methods; Management Style; Segmentation; Debt Securities; Banking Industry

2011
Working Paper

Why Fears about Municipal Credit Are Overblown

Highly publicized predictions of 50-100 municipal defaults have caused anxiety among municipal bond investors. While there is some chance that negative investor sentiment will lead to further spread widening, the probability of the kind of widespread default that would... View Details

Keywords: Financial Crisis; Borrowing and Debt; Insolvency and Bankruptcy; Bonds; Investment Return; City

2024
Working Paper

Smaller than We Thought? The Effect of Automatic Savings Policies

By: James J. Choi, David Laibson, Jordan Cammarota, Richard Lombardo and John Beshears

Medium- and long-run dynamics undermine the effect of automatic enrollment and default savings-rate auto-escalation on retirement savings. Our analysis of 401(k) plans incorporates the facts that employees frequently leave firms (often before matching contributions... View Details

Keywords: Personal Finance; Saving; Retirement; Behavioral Finance; Compensation and Benefits

Research Summary

Corporate Bond Pricing and Different Sources of Asset Return Volatility (with George Chacko and Jens Hilscher)

This paper presents a pricing model for defaultable bonds. Default is defined by a cash flow, not value, covenant. The cash flow (total distributions) yield is stochastic. We find that different sources of volatility, cash flow versus discount rate news, affect... View Details

Research Summary

Sovereign Debt as a Contingent Claim: A Quantitative Approach (joint with Fabio Kanczuk)

By: Laura Alfaro

We construct a dynamic equilibrium model with contingent service and adverse selection to quantitatively study sovereign debt. In the model, benefits of defaulting are tempered by higher future interest rates. For a wide parameter, the only equilibrium is one in which... View Details

September 1992 (Revised March 1997)
Case

Summit Distributors (A)

By: William J. Bruns Jr. and Amy P. Hutton

Summit Distributors was in danger of violating loan covenants because of slow economic activity and forecasted losses and was faced with a choice. Changing the inventory valuation method from LIFO to FIFO would avoid default but would require higher future income... View Details

Keywords: Taxation; Cost Accounting; Cash Flow; Interest Rates; Economic Systems; Borrowing and Debt; Financial Statements; Valuation; Accounting Audits; Financing and Loans; Accounting Industry; Legal Services Industry

Educators

September 2018 (Revised March 2019)
Case

National Australia Bank: Looking Out for the Customer

By: Mark R. Kramer and Hugh Foley

After learning that most defaults were due to health, job or marital problems, National Australia Bank revised its debt collection department to shift from penalizing people in default to assisting them in developing a work-out plan, enabling more than 90% to meet... View Details

Keywords: Banks and Banking; Borrowing and Debt; Customer Focus and Relationships; Success; Australia

Educators

Research Summary

Economic Catastrophe Bonds

(with Joshua Coval and Erik Stafford)

The central insight of asset pricing is that a security's value depends on both its distribution of payoffs across economic states and state prices. In fixed income markets, many investors focus exclusively on estimates of... View Details

November 1989 (Revised December 1996)
Supplement

Wisconsin Central Ltd. Railroad and Berkshire Partners (B): LBO Associations and Corporate Governance

By: Michael C. Jensen

Describes the resolution of the default situation. Further examines the internal control mechanisms and distinct role of the board of directors of a typical LBO association. View Details

Keywords: Corporate Governance; Leveraged Buyouts; Rail Industry

Research Summary

Overview

Professor Schreger studies international finance and macroeconomics, with an emphasis on sovereign debt. Following a series of sovereign debt crises in the 1980s and 1990s, which caused defaults among emerging markets governments on their foreign currency obligations,... View Details

Research Summary

Concentrated Capital Losses and the Pricing of Corporate Credit Risk

By: Emil N. Siriwardane

In studying the U.S. credit default swap (CDS) market, Professor Siriwardane has discovered that the selling of CDS protection is extremely concentrated, with five sellers accounting for nearly half the market. Further, in contrast to what neoclassical theory... View Details

17 Nov 2016
Working Paper Summaries

Sovereign Risk, Currency Risk, and Corporate Balance Sheets

Keywords: by Wenxin Du and Jesse Schreger

25 Mar 2013
Research & Ideas

How Chapter 11 Saved the US Economy

relatively short time, much of the corporate debt that defaulted during the financial crisis has been managed down, mass liquidations have been averted, and corporate profits, balance sheets, and values have rebounded with remarkable... View Details

Keywords: by Kim Girard; Financial Services

October 2014 (Revised April 2018)
Supplement

Creditor Activism in Sovereign Debt: Argentina vs. Holdout Investors (B)

By: Laura Alfaro, Gaurav Toshniwal and Hilary White