Abstract: In this study, the determinants of Turkey's external debt stock were tried to be explained by taking into consideration the factors affecting the original sin. By using the annual time series data for the period 1970-2015, long term relationships were determined via the cointegration approach and short term dynamics were examined using ECM. According to the ARDL bounds test result, cointegration relations were found between the variables. In this context, the long-term ARDL estimation results can be stated as follows: i) The effect of inflation rate, exchange rate regime and money supply on external debt stock are statistically significant and negative. ii) The effect of GDP per capita, debt service, budget balance, domestic credits and trade openness variables on external debt stock are statistically significant and positive.iii) Among these variables, per capita GDP and exchange rate regime effects were found to be more influential on external debt than other variables. On the other hand, the estimation results of the ECM reveal that the short-term imbalances can be removed in the long-term and that variables can converge to their eigenvalues.
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Turkey is one of the aforementioned countries for which borrowing is seen as a problem. Sustainability of the debt stock particularly came into prominence after the economic crisis of 2001 and it has remained one of the most important problems on the agenda since then (Göktan, 2008). After the economic crisis of 2001, attempts were made to control fiscal discipline, and the nominal anchor of primary surplus was used as a control mechanism. However, the current deficit increased swiftly after this period, bringing about the need for financing and providing continuity in economic growth due to the fact that manufacturing requires imports. Privatization gained momentum and the private sector started to replace the public sector in the economy. Low internal savings and in particular high real interest rates until 2008 caused an increase in the external debt level of the private sector. The global economic crisis after 2008 and global liquidity expansion enabled implementation of more flexible policies. The debt sustainability of the emerging economies began to be questioned after statements towards a global consolidation period and the steps to be followed were explained in 2017. All of these developments made the continuity of financial sustainability important for Turkey, as well.
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Our empirical evidences complement to the results on the aforementioned papers. We establish that a higher financial market size raises the debt safety but a huger debt stock can improve its safety only on the economies with high enough income per capita. There- fore, the income per capita plays one crucial role on shaping the impact of debt supply on its safety level. The result holds on controlling for other factors which captures the fundamentals of economy such as inflation rate, trade balance and the institution quality such as financial development and political stability. For example, if the stock market size of Mexico goes up from 6.17% to 40.96%, as the level of Canada, its public debt safety could improve by one magnitude of 7.39, from 12 to 19.39 within the index range from 1 to 21 for sovereign debt ratings. In short, accounting for relative role of public debt safety determinants is our contribution to the literature on safe assets.
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Foreign capital flows in terms of external debt, FDI and workers’ remittances has contributed in the economic growth and development of the capital deficient economies of the globe. Pakistan is one of the economies of the world that have been receiving a huge amount of foreign capital. Foreign capital has its importance in fulfilling the saving-investment and foreign exchange gap in the economy. Lower levelsper capita income in Pakistan economycaused domestic financialresources to fall short for investment. In the recent times, researches to assess the role of the foreign capital in the setting the growth trajectory of the recipient economy has fueled the debate on the impact of foreign capital on investment and growth of the economy. The present study is an attempt to examine the impacts of foreign capital on domestic investment in Pakistan. Foreign capital variables used in the model were external debt stock as percentage of GDP, external debt servicing as percentage of GDP, foreign direct investment as percentage of GDP and workers’ remittances as percentage of GDP. Financial sector play very critical role in stimulating investment in the economyso domestic saving as percentage of GDP, as a proxy variable for financial development, is included in the model as explanatory variable.
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Abstract: The role of external debt in economic growth of developing countries has been questioned since there has been a high incidence of default, low economic growth and high levels of poverty, all of which are associated with high stocks of external debt. Also, the uncertainties about country external debt sustainability position as well as whether countries are already trapped in the debt-overhang situation have underlined point of debate among scholars. This study investigates the dynamic relationship between external debt and economic growth of Nigeria for period of 1985 to 2017 using Johansen approach to cointegration, vector error correction model (VECM) and granger causality test. Data for the study was collected from the CBN statistical bulletin. The findings revealed that debt service payment has negative and insignificant impact on Nigeria’s economic growth while external debt stock has negative and significant effect on economic growth. The causality test indicates no-directional causality between external debt and GDP. From the findings, the study recommends that policy-makers should reformulate the external debt management strategy to minimize sovereign risk through diversification of the external borrowing. This could potentially be achieved by reducing the dependency on one specific debt instrument or currency. Hence, the strategy will be effective if it is carried out in parallel with a comprehensive surveillance and debt-monitoring system.
Following neo classical growth model GDP growth rate is dependent variable and the independent variables are labour, capital, and external debt. The GDP growth (GDPG), Population of working age group (15-64) as percentage of total population (WARP) used as proxy of labour force and Gross capital formation (GKF) used as capital variable data are derived from world development indicator (WDI) of World Bank. Gross capital formation data is converted to natural logarithm data (lnGKF). The debt variable has been divided into two segments i.e., External debt stock as percentage share of GDP (EDGDP) and total debt service as percentage of foreign exchange earnings (TDSEX). The division of debt variable has been done to observe the debt overhang hypothesis and crowding out effect separately. EDGDP and TDSEX data are collected from sixth five year plan (part 3) of Bangladesh and economic review of Bangladesh 2010 respectively. EDGDP and TDSEX are included to capture the effect of debt on economic growth and hypothesized to have adverse effect on GDP growth. lnGKF and WARP are expected to be positive.
Iyoha (1999) carried out an econometric analysis on the effect of external debt on economic growth in Sub-Saharan African countries, the result of his findings suggests that Sub- Saharan Africa‘s external debt stock and debt services payments act to depress investment and lower the economic growth rate. The mid-19 th century experience of developing countries shows high rate of growth which was typically internally generated. During these periods, developing economies strove to increase their growth by engaging in domestic and external debt. The increase in their investment reliance on external resources however, outweighed the domestic as financial transactions internally generated were not sufficient for the huge growth envisaged. The capital market operations in most developing countries make funds available for project execution. In situations where funds are in short supply, the alternative is to seek for assistance externally. External debt therefore, includes all financial assistance received by a country outside its own national boundary and this has increased steadily over the years in developing countries.
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The research work was designed to evaluate capital structure and the performance of quoted companies in Nigeria. The focus was to identify the relationship that exists between capital structure and performance indices such as the net profit margin, return on assets and return on equity. The theoretical component of the study attempted to evaluate the major contending theories of capital structure with the purpose of finding the best empirical explanation for corporate financing choice of a cross section of 94 Nigerian quoted companies. The result showed that Capital mix has a significant relationship with the earnings per share of quoted firms in Nigeria. Debt equity ratio has a significant positive impact on the return on assets of quoted companies in Nigeria and debt asset ratio has a significant inverse relationship with the return on assets of quoted companies in Nigeria. Also debt equity ratio has a significant inverse impact on the return on equity of quoted companies in Nigeria and debt asset ratio has a significant positive impact on return on equity of quoted companies in Nigeria. Quoted companies in Nigeria should invest their profits when there are good investment opportunities and pay cash dividend as soon as enough income is generated. Keyword: Earnings per share, Return on equity, return on assets, Debt stock, Debt/asset ratio
The study investigates the impact of external debt on economic growth in Nigeria for the period 1999-2015. The data for this study was obtained mainly from secondary sources mainly from Central Bank of Nigeria (CBN) Statistical Bulletins and Debt Management Office. Time series data on Gross Domestic Product (GDP) as a proxy for Economic Growth, External Debt Stock (EXDS), External Debt Service Payment (EDSP), and Exchange Rate (EXGR) were used for the analysis. The techniques of Estimation employed in the study include Augmented Dickey Fuller (ADF) test, Johansen Co-integration, Vector Error Correction Mechanism and Granger Causality Test. Results show that external debt has an inverse effect on economic growth in Nigeria. Subsequently, the study recommends that government should empower Debt Management Office to set the mechanism in place, ensure that loans are utilised for purposes they are meant for and prosecute corrupt public officers who siphoned the money.
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depreciation in the panels of six debt trapped and eight non-debt trapped countries. The study informed that budget deficit, current account deficit and exchange rate depreciation played a significant role towards external public debt of a country and therefore policy makers should consider these factors while making decision on external borrowing. The study however only focused on the relationship between external debt variables and the exchange rate rather than the effect of external debt on the exchange rate.Blessing (2013) studied an Empirical Analysis of the Effect of Debt on the Nigerian Economy for the period 1980-2010 using linear regression. In order to achieve the aim of the study, the researcher used external debt stock, external debt service payment and exchange rate as variables to determine their effect on Gross Domestic Product and Gross capital Formation. The study found out that: Nigeria’s external debt stock had a significant effect on her economic growth and Nigeria’s Debt service payment had a significant relationship with her Gross capital Formation. The researcher recommended that the government should avoid borrowing as much as possible and that since developing countries need to borrow at one time or the other to supplement their internal savings, borrowing should become an option only when highly priority projects are considered. In addition to this, the researcher also pointed that borrowed funds should be strictly monitored and evaluated to ensure they are used for the purpose for which they are borrowed. However the results only give the effect of exchange rate on external debt but fail to give the effect of external debt on exchange rate. CHAPTER THREE: METHODOLOGY
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In this paper we develop a theoretical framework to analyze the long-run behavior of an economy characterized by a regime of persis- tent debt. We introduce a stock-flow consistent dynamic model where the economic system is represented by a network of trading relation- ships among agents. Debt contracts are one of such relationships. The model is characterized by a unique and stable steady-state, which pre- dicts that ( i ) aggregate income is always limited from the above by the money supply and that ( ii ) debts cause a redistribution of borrowers’ wealth and income in favor of lenders. In the aggregate this may also lower nominal income, as empirical evidence suggests.
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From the empirical results of the Study, it has been proven in a 5% error level that there is a significant negative relationship between Debt Policy and a firm’s performance. Therefore, it can be concluded that an increase in debt (Short-term, long-term and total debt) will cause a decrease in a firm’s performance. This does not necessarily mean that firms should decrease their debts level as there are other factors which affect firms’ performance. The adjusted R 2 s of the individual regressions fitted in each of the nine (9) hypotheses have ranged from 46% to 65%, indicating a relatively high explanatory power. This means that searching for an optimal Debt Policy is not a one-way affair. Factors such as firm size, firm growth, liquidity, tax rate, asset structure, profitability and other factors should be taken into accounts when a debt policy in being considered. If firms acquire their assets only from debt and do not take into consideration the firm's size and other factors, their performance will not be improved considerably. It was also discovered from the results that most of the firms did not have optimized capital structures. Some firms have tried to increase their debt ratio and move towards an optimised ratio of debt to equity but it seems this has not as yet been achieved by the firms. The result of this Study is consistent with the studies of Abor (2007), Sadeghian et al. (2012) and Zeitun & Tian (2007). All of these Studies express negative effect of debt on firms’ performance.
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A very relevant consequence of these policies since the end of the 19th century was its impact on the monetary policy. Notes and current accounts in banks started to prevail over the metallic coin in the composition of money supply (see Martín Aceña and Pons, 2005). These changes happened in a context of monetary expansion facilitated through the above-mentioned policies that were allowing governments to reduce their liabilities through inflation. Escario, Sabaté and Gadea (2011) found a dynamic causal relationship of the budget balance with monetary growth since 1874 confirming this hypothesis. This relationship weakens from the 1990`s decade onwards as a result of the effort of nominal convergence that happened before the integration towards the euro. In short, the above-mentioned policies caused an increase in the monetary base and simultaneously, they generated inflation and monetary depreciation. These circumstances appear reflected in our empirical analysis in Section 4, where we find a negative estimated sign showing that an increase in the perpetual debt variable produces a smaller probability of currency crises in Spain.
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We then investigate the determinant of each debt share. Interestingly we find that, apart from each country characteristics, only a few (but distinct group) of firm characteristics help explain the level of each debt share. In particular, being listed on the stock-market now seems to explain the share of short and long-term bank debt, whereas doing R&D (i.e. our proxy for more opaque firms) does not affect any type of debt share. Always controlling for financial constrained firms, we also find again that firms in Italy, Spain and Hungary rely on a greater share of short-term bank loans. We conclude that firm age and size seem to significantly affect the way firms combine the different types of debt but not the level of each debt share, while being listed in the stock market seems to only affect the level of the share of bank debt (both short-term and long-term). Spanish and German firms have the most diversified debt structure. Further, we investigate whether the different level of debt concentration of European firms is a result of supply or demand-side factors. To do that, we compare in each country financially constrained firms with non-financially constrained firms (to control for the supply effect of bank loans) versus the same difference for firms located in Germany (to control for the demand effect in the securities market). We find that firms located in Spain chose to rely on the most diversified debt structure, though the effect is not economically sizeable.
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Urgent reform of the 1996 Joint-Stock Company Act is needed to prevent the Gazprom model from being widely applied in hostile takeovers of other Russian business associations. One obvious reform would be to limit the ability of companies to pledge shares as collateral for commercial debt. This would prevent creditors from obtaining the sort of favourable position from which they may easily launch surreptitious hostile takeovers in circumvention of the regulations of the Joint-Company Stock Act. On the other hand, limiting the ability of borrowers to provide security might dry up Russian capital markets to a degree. Well-regarded scholars, however, have questioned whether secured financing is anything more than a zero-sum game, that is, whether permitting security does not increase the overall pool of credit but rather simply shifts credit from one borrower to another. 83 A related approach would be to regulate debt-equity
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Derivative market has an important role to play in economic development of a country. Change in exchange rates, interest rates and stock prices of different financial markets have increased the financial risk to the corporate world. Adverse changes in the macroeconomic factors have even threatened the very survival of business world. It is therefore necessary to develop a set of new financial instruments known as derivatives in the Indian financial markets, to manage such risk. The objectives of these instruments is to provide commitments to prices for future dates for giving protection against adverse movements in future prices, in order to reduce the extent of financial risks. This paper traces the growth and current position of India derivative market the present study is an effort to analyze derivative trading in India. It is an effort to demonstrate the growth and expansion of financial derivative of NSE in India the time period i,e 2010-2011 to 2017-18.The market turnover has grown from Rs.17663664.57 Cr. in 2009-2010 to 1163539816.124 Cr. in 2017-18.
In what concerns the real-financial linkages in this approach, there have been some initial efforts to address household debt accumulation (Pariboni, 2016; Fagundes, 2017; Mandarino, 2018) and to make financial determinants of autonomous expenditures en- dogenous (Brochier and Macedo e Silva, 2018) employing the stock-flow consistent (SFC) methodology. Those papers that focus on household debt already take into account the negative effect that debt service payments or debt amortization might have on an eco- nomic system in which household credit-based consumption leads growth. Household debt accumulation becomes unstable if the negative rate of amortization of loans exceeds the growth rate of autonomous expenditures (Fagundes, 2017; Pariboni, 2016). This condi- tion can be interpreted as saying that rate of expansion of the autonomous expenditures (and thus of capital accumulation and income in the long run) must be higher than the rate at which households roll over their debt principal.
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11 Portuguese stock markets are positively affected by changes in the French and Portuguese debt ratings respectively. Moreover, coefficients of 𝛾 2 are positive and significant at the 5% and 1% levels respectively. The significant and positive effect on dynamic conditional correlations suggests that the revisions of debt ratings generate a contagion effect across the stock markets of the studied countries. Determining these effects is important for several reasons. Indeed, countries negatively affected by other countries ’ rating should avoid issuing new stocks in the period following that downgrading as such news will put upward pressure on the required return on their own new issue. In addition, these results can be used by market participants in asset pricing and allocation, as well as risk management.
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In a landmark paper, Miller (1977) hypothesizes that stock prices are biased to the valuations of optimists rather than pessimists as pessimistic investors do not participate in the market due to short-sales constraints. By documenting that high earnings forecast dispersion is associated with low stock returns, Ackert and Athanasakkos (1997), Dische (2002) and Diether et al. (2002) provide evidence in support of Miller’s conjecture; while Hintikka (2008) and Leippold and Lohre (2008) find that high dispersion stocks also underperform in many European markets. Chang, Cheng and Yu (2007) test Miller’s (1977) hypothesis for equities listed in Hong Kong and also support Miller’s conjecture. However, Diamond and Verrecchia (1987) challenge Miller (1977) and argue that if traders have rational expectations, short-sale constraints do not lead to biased prices. Berkman, et al. (2009) state that Miller’s (1977)
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Empirical studies reviewed reveal mixed evidence on the impact of external debt on economic growth. Hameed et al. (2008) examine the dynamic effects of external debt servicing, capital stock and labour force on the economic growth in Pakistan for the period 1970-2003. Their findings reveal a negative relationship between external debt servicing and economic growth. They find an adverse effect of external debt servicing on labour and capital productivity. Similar results were found by Uma,Eboh and Obidike (2013) in Nigeria using data for period 1970-2010. Butts (2009) investigate the causal relationship between short term external debt and GDP growth rate for 27 Latin American and Caribbean countries over the period 1970-2003 and found evidence of granger causality meaning in 13 countries.