Presentation on theme: "Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms Ginka Borisova Iowa State University Bill Megginson."— Presentation transcript:
Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms Ginka Borisova Iowa State University Bill Megginson Kate Holland The University of Oklahoma Veljko Fotak Sovereign Investment Laboratory Bocconi University The University of Oklahoma Sovereign Investment Laboratory Bocconi University The University of Oklahoma Sovereign Investment Laboratory Bocconi University
Rise in government ownership around the world Since 2000, US$ 969 billion from SDC Sovereign wealth funds (SWFs) Bailouts Privatization (the opposite process) Since 2000, US$ 725 billion from SDC Broad impact on all aspects of investment targets Corporate governance Profitability Prevalent use of debt by companies Unexplored question: cost of debt? Introduction
Government ownership might carry an implicit debt guarantee that increases the probability of repayment, thus lowering the cost of debt. Government ownership might lead to a higher cost of debt through three channels: 1.By increasing moral hazard due to the implicit government guarantee; 2.By reducing incentives for management and external monitors; 3.By hampering the profitability of the firm through the imposition of social and political goals. Possible Impact Of Government Stock Ownership On Cost Of debt
Lower probability of default for government firms Lower Cost Debt : Faccio, Masulis, and McConnell (2006) find that politically connected firms are more likely to be recipients of government bailouts Brown and Dinç (2009) present evidence that defaults of government-owned banks are less common than defaults of privately-owned banks Borisova and Megginson (2011) at high stakes, credit spreads lower Literature Supporting Lower Cost Of Debt from Government Ownership
Implicit government guarantee and moral hazard Higher Cost Debt : Stiglitz, Jaramillo-Vallejo, and Park (1993) Borisova and Megginson (2011): BH-SH conflict Impaired monitoring Higher Cost of Debt : OECD (1998): less incentives for bondholders to monitor Eckel and Vermaelen (1986): government presence decreases the threat of a takeover Bortolotti, Fotak, and Megginson (2010): monitoring gap Literature Supporting Higher Cost Of Debt from Government Ownership
Governments have other goals Higher Cost of Debt : Shleifer (1998) Megginson et al (1994) and other privatization literature – government presence and goals lead to inefficiencies Jensen (2002) – value destruction effect of conflicting goals Kahan and Rock (2010) – governments can impose their own goals more easily than private shareholders Implicit guarantees can lower probability of default and the cost of debt But the last 3 channels point to an increase in the probability of distress and hence in the cost of debt The net effect is a matter of empirical investigation. We simply hypothesize: Literature Supporting Higher Cost Of Debt from Government Ownership
H1: Government ownership impacts the cost of debt of investment targets. H2: The impact of government ownership on the cost of debt of investment targets differs during recessions and periods of market-wide financial distress. – Importance of government guarantees during distress counters greater probability of default H3: The impact of government ownership on the cost of debt of investment targets differs during periods of firm- specific distress. Hypotheses
H4: The impact of government ownership on the cost of debt of investment targets differs according to the type of government investment vehicle. Activism by different branches: – Central Government (national, treasury, ministries) – Local Government (city, state, region) – SOE Full Mixed – Government Financial Institutions (central and development banks and other financial institutions) – Pensions Funds – SWF Protectors Investors
Hypotheses H5: The impact of government ownership on the cost of debt of investment targets will differ for domestic firms. Lower cost of debt for domestic targets: 1. Geographic proximity and lower information asymmetry Almazan, deMotta, Titman, Uysal (2010) Baik, Kang, Kim (2010) 2. Foreign governments are passive investors Bortolotti, Fotak, Megginson (2010) Constrained Foreign Government Investor Hypothesis Worry about public opposition Lower cost of debt for foreign targets: 1.Foreign investors are better monitors Ferreira, Matos (2008) Djankov, Murrell (2002) Brown, Earle, Telegdy (2006, 2010) 2. Foreign governments less likely to impose social and political goals on targets
Data Collect government purchases in publically traded firms from SDC M&A 1980-2010 ( 2,517 transactions with DS code by 1,953 unique targets) SDC New Issues to look for plain vanilla bonds 1990-2010 ( 7,804 bonds from 388 unique issuers) – Find ISINs (2,977 bonds have ISIN from SDC + 945 additional bond ISINs are found in Datastream) 3,922 bonds TOTAL Collect yearly bond data from Datastream (3d November Wednesday) : – Yield (spread to benchmark) 10,124 bond year spreads – Rating (S&P) 6,854 bond years with spread & rating 1,554 bonds by 278 firms – Get collateral and instrument type from Bloomberg:
Data WorldScope accounting data Find government ownership in each target 1990-2010 – Thomson One Banker ownership module + annual reports, websites, press releases, EDGAR, CEDAR, Privatizations Barometer, World Bank, Lexis-Nexis. FINAL SAMPLE: 214 firms 289 transactions (government purchases) 1,278 bonds; 5,124 bond years 43 countries ; between 1990-2010
Controls Bond-level: – Quality control Credit rating: lower probability of default; negative throughout the models – Liquidity controls Maturity: (+) Firm-level: – Leverage: increases probability of default – Profitability: Negative effect (ROE) – Size and M_B : Negative effect
Descriptive Statistics Greatest total value of acquisitions: by U.K. govt, followed by Singapore Greatest total value of investments: in U.K., followed by U.S. Top target industry (value) is finance and real estate (SIC 6), then transportation, communication, and electric (SIC 4)
Mean Difference Tests and Univariate Analysis Banks with gov. ownership have lower avg. spreads than non-banks, regardless of the time period Without gov. ownership, banks vs. non-banks:
Panel Regressions Panel data with year, bond collateral/instrument type, bond currency, and issuer country fixed effects issuer-clustered errors (Petersen, 2009) lagged ownership Datta et al. (1999) residual transformation for rating To address the a priori effects of government ownership on credit rating determination Rating is regressed on all other explanatory variables Residuals are saved, used in the main model to replace original values Bailouts are excluded from models using observations from the 2008 Financial Crisis (9% of total sample) The dependent variable – credit spread (y it ) – the difference between the corporate bonds current yield to maturity and that of government bond closest matched maturity – proxies for the cost of debt.
Government Ownership and the Cost of Debt Government ownership is linked to a higher cost of debt Non-linear – at higher level of government ownership guarantees lead to a lower cost of debt All observations Bailouts removed PresenceStakeBoth PresenceStakeBoth 2nd Stage Model 1Model 2Model 3 Model 4Model 5Model 6 Model 7 Govt presence 29.21** 36.46*** 27.73* 37.07** 44.98*** 2.226 2.677 1.928 2.522 3.247 Govt stake % -0.267-0.569** -0.839*** -2.025 -1.997-2.855 Constant 264.5***275.9***269.0*** 219.8***242.1***232.0*** 367.0*** 4.1214.2444.170 3.4003.6183.559 3.228 Observations 5124 4645 5124 R-squared 0.550.5470.55 0.5560.5540.557 Wald χ 2 8656
Government Ownership, Financial Crises and the Cost of Debt Government ownership is linked to a higher cost of debt (59 bp) Government ownership is linked to a lower cost of debt during crises (23 bp) Similar for banking crises: government ownership outside crises is linked with higher cost of debt (39 bp) but with a lower cost of debt (14 bp) during the crises Financial Crisis Banking Crises All observationsBailouts removed2nd StageAll Observations2nd Stage PresenceStakePresenceStakePresence Model 1Model 2Model 3Model 4Model 5Model 6Model 7 Govt ownership58.94***0.32549.91***-0.10666.36***39.01***27.85* 4.1420.8933.2690.2914.6893.1191.865 Govt ownership * Fin. crisis -82.28***-1.272**-70.50**-1.079*-81.73*** -2.976-2.369-2.044-1.831-7.98 Fin. crisis439.9***446.2***127.2***130.6***152.1 14.10715.5793.6976.341.422 Govt ownership * Banking crisis -53.15*-53.60*** -1.924-5.176 Banking crisis 65.40***68.66*** 2.7716.299 Constant268.9***273.6***226.4***241.7***379.5***261.4***393.9*** 4.2614.1943.5153.5943.3564.1523.476 Observations5124 4645 5124 R-squared0.5540.5490.560.555 Wald χ 2 8879.1 8863.6
Government Ownership and Firm- Specific Distress Government presence is linked to a higher cost of debt for non-investment grade firms Greater stake owned by state yields lower spreads for non-investment grade firms and high leverage firms Government presence is linked to a lower cost of debt for non-investment grade firms and high leverage firms during the crisis
Domestic and Foreign Government Ownership Domestic government ownership is linked to lower cost of debt during the crisis Foreign government ownership is linked to a higher cost of debt outside of crisis Even more pronounced for non-investment grade firms
Conclusions State ownership leads to a LOWER cost of debt: – During the recent financial crisis – During various banking crises – For highly-levered firms – For high-yield bonds Overall, results indicate the impact is an implicit debt guarantee, more valuable in times of distress and specific to domestic state ownership. But outside of the above, government ownership is associated with a HIGHER cost of debt.
The Contribution MAIN FINDING: Domestic govt ownership reduces cost of debt during times of distress Govt ownership associated with higher cost of debt outside distress CONTRIBUTIONS: To the literature on state ownership: – Documenting the impact of government ownership on cost of debt – Showing that not all government entities have the same impact – Providing evidence of an implicit government guarantee being priced To literature on bond pricing: – Providing evidence that identity, or at least type, of major shareholders a priced factor To literature on cross-border investments: – Providing evidence indicating that cross-border investments by governments do not provide an implicit debt guarantee as do domestic government investments
Thank You William L. Megginson email@example.com http://faculty-staff.ou.edu/M/William.L.Megginson-1/
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