European Union and the developing nations' external debt : EU-15's debt policy, 1960–2008

This Master's Thesis defines the debt policy of the current European Union Member States towards the developing nations. Since no official policy for debt exists in the EU, it is defined to include debt practices (loans and debt relief in development cooperation) and debt within the EU development policy framework. This study (1) describes how the issue of external debt appears in the development policy framework, (2) compares EU Member States' given loans and debt relief to grants for the developing nations (1960s to the 2000s), and (3) measures the current orientation in ODA of each EU Member State between grant aid and loan aid using the Grant-Loan Index (GLI). Theoretical aspects include reasons for selecting between loans (Bouchet 1987) and grants (Odedokun 2004, O'Brien and Williams 2007), policy context of the EU (Van Reisen 2007) and the meaning of external debt in the set-up between the North and the South. In terms of history, the events and impact of the colonial period (where loans have originated) are overviewed and compared in light of today's policies. Development assistance statistics are derived from the OECD DAC statistics portal and EU development policy framework documents from the EU portal. Methodologically, the structure of this study is from policy analysis (Barrien 1999, Hill 2008, Berndtson 2008), but it has been modified to fit the needs of studying a non-official policy. EU Member States are divided into three groups by Carbone (2007a), the Big-3, Northern and Southern donors, based on common development assistance characteristics. The Grant-Loan Index is used to compare Carbone's model, which measures quality of aid, to the GLI measuring the structure of aid. Results indicate that EU- 15 countries (active in debt practices) differ in terms of timing, stability and equality of debt practices in the long-term (1960s to the 2000s). In terms of current practices, (2000-2008), it is noted that there lies a disparity between the actual practices and the way in which external debt is represented in the development policy framework, although debt practices form a relevant portion of total ODA practices for many EU-15 Member States, the issue itself plays a minor role in development policy documents. Carbone’s group division applies well to the Grant – Loan Index’s results, indicating that countries with similar development policy behaviour have similarities in debt policy behaviour, with one exception: Greece. On the basis of this study, it is concluded that EU development policy framework content in terms of external debt and debt practices are not congruent. The understanding of this disparity between the policy outline and differences in long-term practices is relevant in both, reaching the UN’s Millennium Development Goals, and in the actual process of developing development aid.

Corporate Funding on the European Debt Capital Market

The integrated European debt capital market has undoubtedly broadened the possibilities for companies to access funding from the public and challenged investors to cope with an ever increasing complexity of its market participants. Well into the Euro-era, it is clear that the unified market has created potential for all involved parties, where investment opportunities are able to meet a supply of funds from a broad geographical area now summoned under a single currency. Europe’s traditionally heavy dependency on bank lending as a source of debt capital has thus been easing as corporate residents are able to tap into a deep and liquid capital market to satisfy their funding needs. As national barriers eroded with the inauguration of the Euro and interest rates for the EMU-members converged towards over-all lower yields, a new source of debt capital emerged to the vast majority of corporate residents under the new currency and gave an alternative to the traditionally more maturity-restricted bank debt. With increased sophistication came also an improved knowledge and understanding of the market and its participants. Further, investors became more willing to bear credit risk, which opened the market for firms of ever lower creditworthiness. In the process, the market as a whole saw a change in the profile of issuers, as non-financial firms increasingly sought their funding directly from the bond market. This thesis consists of three separate empirical studies on how corporates fund themselves on the European debt capital markets. The analysis focuses on a firm’s access to and behaviour on the capital market, subsequent the decision to raise capital through the issuance of arm’s length debt on the bond market. The specific areas considered are contributing to our knowledge in the fields of corporate finance and financial markets by considering explicitly firms’ primary market activities within the new market area. The first essay explores how reputation of an issuer affects its debt issuance. Essay two examines the choice of interest rate exposure on newly issued debt and the third and final essay explores pricing anomalies on corporate debt issues.

With Good Reputation Size Does not Matter: Issue Frequency and the Determinants of Debt Maturity

This paper examines empirically the effect firm reputation has on the determinants of debt maturity. Utilising data from European primary bond market between 1999 and 2005, I find that the maturity choice of issuers with a higher reputation is less sensitive to macroeconomic conditions, market credit risk-premiums, prevailing firm credit quality and size of the debt issue. The annualised coupon payments are shown to be a significant factor in determining the debt maturity and reveal a monotonously increasing relationship between credit quality and debt maturity once controlled for. Finally, I show that issuers lacking a credit rating have an implied credit quality positioned between investment-grade and speculative-grade debt.

Essays on macroeconomic effects of fiscal policy rules

Economic and Monetary Union can be characterised as a complicated set of legislation and institutions governing monetary and fiscal responsibilities. The measures of fiscal responsibility are to be guided by the Stability and Growth Pact, which sets rules for fiscal policy and makes a discretionary fiscal policy virtually impossible. To analyse the effects of the fiscal and monetary policy mix, we modified the New Keynesian framework to allow for supply effects of fiscal policy. We show that defining a supply-side channel for fiscal policy using an endogenous output gap changes the stabilising properties of monetary policy rules. The stability conditions are affected by fiscal policy, so that the dichotomy between active (passive) monetary policy and passive (active) fiscal policy as stabilising regimes does not hold, and it is possible to have an active monetary - active fiscal policy regime consistent with dynamical stability of the economy. We show that, if we take supply-side effects into ac-count, we get more persistent inflation and output reactions. We also show that the dichotomy does not hold for a variety of different fiscal policy rules based on government debt and budget deficit, using the tax smoothing hypothesis and formulating the tax rules as difference equations. The debt rule with active monetary policy results in indeterminacy, while the deficit rule produces a determinate solution with active monetary policy, even with active fiscal policy. The combination of fiscal requirements in a rule results in cyclical responses to shocks. The amplitude of the cycle is larger with more weight on debt than on deficit. Combining optimised monetary policy with fiscal policy rules means that, under a discretionary monetary policy, the fiscal policy regime affects the size of the inflation bias. We also show that commitment to an optimal monetary policy not only corrects the inflation bias but also increases the persistence of output reactions. With fiscal policy rules based on the deficit we can retain the tax smoothing hypothesis also in a sticky price model.

Tax Reform and Payout Policy:Do Shareholder Clienteles or Payout Policy Adjust?

Changes in taxation of corporate dividends offer excellent opportunities to study dividend clientele effects. We explore payout policies and ownership structures around a major tax reform that took place in Finland in 2004. Consistent with dividend clienteles affecting firms’ dividend policy decisions, we find that Finnish firms altered their dividend policies based on the changed tax incentives of their largest shareholders. While firms adjust their payout policies, our results also indicate that ownership structures of Finnish firms also changed around the 2004 reform, consistent with shareholder clienteles adjusting to the new tax system.

Essays on the Costs and Benefits of Large Shareholders in Corporate Governance (summary section only)

“Corporate governance deals with the ways in which suppliers of finance to firms assure themselves of getting a return on their investment” (Shleifer and Vishny (1997, p. 737). According to La Porta et al. (1999), research in corporate finance relevant for most countries should focus on the incentives and capabilities of controlling shareholders to treat themselves preferentially at the expense of minority shareholders. Accordingly, this thesis sets out to answer a number of research questions regarding the role of large shareholders in public firms that have received little attention in the literature so far. A common theme in the essays stems from the costs and benefits of individual large-block owners and the role of control contestability from the perspective of outside minority shareholders. The first essay empirically examines whether there are systematic performance differences between family controlled and nonfamily controlled firms in Western Europe. In contrast to the widely held view that family control penalizes firm value, the essay shows that publicly traded family firms have higher performance than comparable firms. In the second essay, we present both theoretical and empirical analysis on the effects of control contestability on firm valuation. Consistent with the theoretical model, the empirical results show that minority shareholders benefit from a more contestable control structure. The third essay explores the effects of individual large-block owners on top management turnover and board appointments in Finnish listed firms. The results indicate that firm performance is an important determinant for management and board restructurings. For certain types of turnover decisions the corporate governance structure influences the performance / turnover sensitivity. In the fourth essay, we investigate the relation between the governance structure and dividend policy in Finnish listed firms. We find evidence in support of the outcome agency model of dividends stating that lower agency conflicts should be associated with higher dividend payouts.

Corporate Environmental Responsibility in Demand Networks (summary section only)

Research on corporate responsibility has traditionally focused on the responsibilities of companies within their corporate boundaries only. Yet this view is challenged today as more and more companies face the situation in which the environmental and social performance of their suppliers, distributors, industry or other associated partners impacts on their sales performance and brand equity. Simultaneously, policy-makers have taken up the discussion on corporate responsibility from the perspective of globalisation, in particular of global supply chains. The category of selecting and evaluating suppliers has also entered the field of environmental reporting. Companies thus need to tackle their responsibility in collaboration with different partners. The aim of the thesis is to further the understanding of collaboration and corporate environmental responsibility beyond corporate boundaries. Drawing on the fields of supply chain management and industrial ecology, the thesis sets out to investigate inter-firm collaboration on three different levels, between the company and its stakeholders, in the supply chain, and in the demand network of a company. The thesis is comprised of four papers: Paper A discusses the use of different research approaches in logistics and supply chain management. Paper B introduces the study on collaboration and corporate environmental responsibility from a focal company perspective, looking at the collaboration of companies with their stakeholders, and the salience of these stakeholders. Paper C widens this perspective to an analysis on the supply chain level. The focus here is not only beyond corporate boundaries, but also beyond direct supplier and customer interfaces in the supply chain. Paper D then extends the analysis to the demand network level, taking into account the input-output, competitive and regulatory environments, in which a company operates. The results of the study broaden the view of corporate responsibility. By applying this broader view, different types of inter-firm collaboration can be highlighted. Results also show how environmental demand is extended in the supply chain regardless of the industry background of the company.

Work/Family Reconciliation: Corporate Management, Family Policies, and Gender Equality in the Finnish Context

Work/family reconciliation is a crucial question for both personal well-being and on societal level for productivity and re-production throughout the Western world. This thesis examines work/family reconciliation on societal and organisational level in the Finnish context. The study is based on an initial framework, developing it further and analysing the results with help of it. The methodology of the study is plural, including varying epistemological emphasis and both quantitative and qualitative methods. Policy analysis from two different sectors is followed by a survey answered by 113 HR-managers, and then, based on quantitative analyses, interviews in four chosen case companies. The central findings of the thesis are that there indeed are written corporate level policies for reconciling work and family in companies operating in Finland, in spite of the strong state level involvement in creating a policy context in work/family reconciliation. Also, the existing policies vary in accessibility and use. The most frequently used work/family policies still are the statutory state level policies for family leave, taking place when a baby is born and during his or her first years. Still, there are new policies arising, such as a nurse for an employee’s child who has fallen ill, that are based on company activity only, which shows in both accessibility and use of the policy. Reasons for developing corporate level work/family policies vary among the so-called pro-active and re-active companies. In general, family law has a substantial effect for developing corporate level policies. Also headquarter gender equality strategies as well as employee demands are important. In regression analyses, it was found that corporate image and importance in recruitment are the foremost reasons for companies to develop policies, not for example the amount of female employees in the company. The reasons for policy development can be summarized into normative pressures, coercive pressures and mimetic pressures, in line with findings from institutional theory. This research, however, includes awareness of different stakeholder interests and recognizes that institutional theory needs to be complemented with notions of gender and family, which seem to play a part in perceived work/family conflict and need for further work/family policies both in managers’ personal lives and on the organisational level. A very central finding, demanding more attention, is the by HR managers perceived change in values towards work and commitment towards organisation at the youngest working generation, Generation Y. This combined with the need for key personnel has brought new challenges to companies especially in knowledge business and will presumably lead to further development of flexible practices in organisations. The accessibility to this flexibility seems to, however, be even more dependent on the specific knowledge and skills of the employee. How this generation will change the organisations remains to be seen in further research.