This paper reports the results of an investigation of the impact of digital transformation on debt financing costs. By integrating information asymmetry theory and agency theory, we have developed a threefold risk-theoretic model to demonstrate how corporate digital transformation affects a firm’s debt financing costs. Drawing on a dataset of Chinese listed companies from 2007 to 2022, we measured digital transformation across three dimensions: attention, investment, and outcomes. The findings reveal that corporate digital transformation significantly reduces the cost of debt financing for companies. Mechanism tests indicate that digital transformation reduces debt financing costs by mitigating information risk, agency risk, and earnings risk through enhanced information disclosure quality, strengthened corporate governance, and improved expected earnings. Our paper not only enriches emerging research on the impact of corporate digital transformation on financial accounting but also provides theoretical insights for effectively alleviating the issue of expensive financing.

This paper develops an index of financial stress for the Canadian financial system. It is a continuous variable with a spectrum of values, where extreme values are called financial crises. An internal Bank of Canada survey is used to condition the choice of variables. The authors show that alternative measures of financial crisis suggested by the literature do not accurately reflect the Canadian experience, while several measures developed in this paper are more representative and are thus likely better suited to a developed financial system. An accurate characterization of stress is a prerequisite for any researcher attempting to forecast financial crises.

This study finds that equity returns in the banking sector in the wake of the Great Recession and the European sovereign debt crisis have been driven mainly by weak growth prospects and heightened sovereign risk; and to a lesser extent by deteriorating funding conditions and investor sentiment. While the equity return performance in the banking sector has been dismal in general, there is some evidence that better capitalized and less leveraged banks have outperformed their peers in times of stress.

Using a large sample of firms with single-name credit default swap (CDS) contracts in 30 countries, we document the evidence that political uncertainty, proxied by national election dummy, is positively related to firm-level credit risk. Specifically, this positive relation is more pronounced for the firms that have no political connection or poor international diversification, and in the countries with higher political uncertainty and lower investor protections. Further, by using a difference-in-differences approach, we find evidence to support idiosyncratic volatility and debt rollover channels through which political uncertainty affects the credit risk of individual firm.

This paper finds the first evidence of time variation in the relationship between inflation expectations and the price of cryptocurrency futures. Daily data on the futures markets of Bitcoin – starting in December 2017 – and Ethereum – available since February 2021 – reveal responses to inflation expectations that are consistently positive across both measures in a full sample encompassing 2022. These results hold for a sample that precedes the Luna crash in May 13, 2022. However, the response turns negative in the period between the failures of the Luna and FTX crypto exchanges. We find cryptocurrency futures provide an effective hedge against inflation expectations and may provide a hedge against idiosyncratic market risk if the ensuing uncertainty is embraced by traders leading them to search-for-yield behavior. Risk that is more systemic – and not properly digested by financial markets – may lead futures contract holders to exit their positions ahead of expiration, leading to a bid down of futures prices and an erosion of their hedging ability. This may have contributed to the turbulence in cryptocurrencies experienced during the latter part of 2022.

This paper derives the user cost of monetary assets and credit card services with interest rate risk under the assumption of intertemporal non-separability. Barnett and Su (2016) derived theory permitting inclusion of credit card transaction services into Divisia monetary aggregates. The risk adjustment in their theory is based on consumption capital asset pricing model (CCAPM) under intertemporal separability. The equity premium puzzle focusses on downward bias in the CCAPM risk adjustment to common stock returns. Despite the high risk of credit card interest rates, the risk adjustment under the CCAPM assumption of intertemporal separability might nevertheless be similarly small. While the known downward bias of CCAPM risk adjustments are of little concern with Divisia monetary aggregates containing only low risk monetary assets, that downward bias cannot be ignored, once high risk credit card services are included. We believe that extending to intertemporal non-separability could provide a non-negligible risk adjustment, as has been emphasized by Barnett and Wu (2015). In this paper, we extend the credit-card-augmented Divisia monetary quantity aggregates to the case of risk aversion and intertemporal non-separability in consumption. Our results are for the “representative consumer” aggregated over all consumers. While credit-card interest-rate risk may be low for some consumers, the volatility of credit card interest rates for the representative consumer is high, as reflected by the high volatility of the Federal Reserve’s data on credit card interest rates aggregated over consumers. One method of introducing intertemporal non-separability is to assume habit formation. We explore that possibility.

This paper studies how the COVID-19 shock affects the CDS spread changes and abnormal stock returns of U.S. firms with different levels of debt rollover risk. We use the COVID-19 crisis as a quasi-natural experiment of adverse cash flow shock that increases the default risk of firms facing an immediate liquidity shortfall. We find that the COVID-19 shock significantly increased the CDS spread and decreased the shareholder value for firms facing higher debt rollover risk. The effect is stronger for non-financial firms, for firms that are financially constrained, and for firms that are highly volatile. Moreover, we find that firms with immediate refinancing needs suffered more than firms with distant refinancing needs during the COVID-19 shock, which further confirms that firms’ debt rollover risk is indeed a key factor that drives the heterogenous reactions to the shock. The paper provides fresh insights into the role of firms’ debt rollover risk during the COVID-19 health crisis.

We propose a contingent clawback bond (COCLA) as an alternative source of contingent convertible capital (CoCo). We develop a utility maximization model in which a bank manager faces the following two trade-offs: one trade-off is between the private benefits of control and costs of financial distress when loans under-perform, and the other is between the costs and benefits of screening loan credit quality (effort). In our model, the supply of loans, amount of junior debt issued, level of effort exerted by a manager, and manager's decision to exercise the clawback option are endogenously determined in the maximization of the manager's utility function. We find that the manager optimally exercises the clawback following a low realization of cash flows, thereby solving the trigger problem presented in CoCos. In the model, the debt to equity conversion from the COCLA is an endogenous decision, the regulatory capital adequacy ratio (CAR) is satisfied, and the bank does not face distress costs. From a practical perspective, the conversion rate for the COCLA that jointly maximizes the manager's expected utility and stock holders’ pay offs is around 25%, a rate close to the typical percentage (30%–35%) that is often found in initial public offering clawback (IPOC) contracts used in the corporate world.

Using the Troubled Asset Relief Program (TARP) as a laboratory, this paper examines the impacts of bank bailouts on bank-dependent clients. We find that large TARP recipient banks reduce credit supply to dependent borrowers in the post-TARP period. A large fraction of credit supply reduction is due to regulatory uncertainty on account of an increased likelihood of fines. Liquidity hoarding by TARP banks also drives part of the reduction in credit supply. Relationship borrowers experience a valuation loss around the announcements of their main banks’ TARP approvals consistent with a credit supply reduction.

Increasing accounting information comparability (AIC) theoretically facilitates investors’ analysis of firm performance and improves stock price informativeness by incorporating more firm-specific information. However, achieving the purported purpose empirically is subject to firms’ institutional environment and corporate governance. We propose that under weak legal systems and less developed market environments, higher AIC may adversely affect price informativeness due to managers’ incentives and ability to obfuscate information and investors’ “hallo” effect. Using a large sample from China, we show that the AIC is positively related to price synchronicity, an inverse measure of price informativeness. Additionally, the positive impact is significantly greater for firms located in regions with weak legal systems and less developed market environments. The positive relation is also significantly greater when the business environment and economic policy uncertainties are high.