Enhancing security value by ownership restrictions: evidence from a natural experiment.We present new evidence from a natural experiment to show circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact.
2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or in which ownership restrictions can enhance value. Our evidence is based on multiple restricted bond issues by an emerging market issuer at 150 basis points lower than comparable bonds, resulting in a billion dollars saving. This is intriguing in·trigue
a. A secret or underhand scheme; a plot.
b. The practice of or involvement in such schemes.
2. A clandestine love affair.
v. : how can an emerging market issuer with junk bond junk bond, a bond that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. ratings obtain such low yields? We argue ownership restrictions enhance value since they enable an issuer to precommit to renegotiate re·ne·go·ti·ate
tr.v. re·ne·go·ti·at·ed, re·ne·go·ti·at·ing, re·ne·go·ti·ates
1. To negotiate anew.
2. To revise the terms of (a contract) so as to limit or regain excess profits gained by the contractor. efficiently with a favored clientele in the potential default states, thereby circumventing deadweight costs of prolonged pro·long
tr.v. pro·longed, pro·long·ing, pro·longs
1. To lengthen in duration; protract.
2. To lengthen in extent. negotiations, particularly when the restricted clientele also values the underlying collateral higher than other investors. Ownership restrictions can also result in a transfer of value from holders of unrestricted bonds to holders of restricted bonds because of implicit seniority of the latter. We empirically test and find support for both value enhancement and value transfer and show robustness to several alternative explanations. Our evidence suggests' that firms can benefit from designing securities with ownership restrictions, by offering new securities exclusively to investors who value them the most.
The literature on security design has typically given relatively little attention to the role of ownership restrictions in designing securities. (1) Interestingly, few articles in this area suggest restricting ownership in any fashion. The general view is that ownership restrictions are unnecessary or even detrimental det·ri·men·tal
Causing damage or harm; injurious.
detri·men . They are unnecessary because investors can self-select which securities they wish to hold (therefore, there is no need for a firm to restrict securities ex ante). They can be detrimental because ownership restrictions can affect demand, leading to a negative effect on a security's price because of constriction constriction /con·stric·tion/ (kon-strik´shun)
1. a narrowing or compression of a part; a stricture.constric´tive
2. a diminution in range of thinking or feeling, associated with diminished spontaneity. of demand. (2)
We hypothesize hy·poth·e·size
v. hy·poth·e·sized, hy·poth·e·siz·ing, hy·poth·e·siz·es
To assert as a hypothesis.
To form a hypothesis. and present evidence that ownership restrictions can be beneficial to an issuer in obtaining higher prices (lower yields) for its bond offering to a targeted clientele. We present evidence from a natural experiment: multiple events of capital raising totalling $9.7 billion by an emerging market issuer (namely, India's largest bank, the State Bank of India State Bank of India (SBI) (LSE: SBID) is the largest bank in India. If one measures by the number of branch offices and employees, SBI is the largest bank in the world. Established in 1806 as Bank of Bengal, it is the oldest commercial bank in the Indian Subcontinent. ) exclusively from Indians INDIANS. The aborigines of this country are so called.
2. In general, Indians have no political rights in the United States; they cannot vote at the general elections for officers, nor hold office. living abroad. We provide evidence that these bonds were priced substantially higher than comparable emerging market debt leading to a difference of about 150 basis points in yields which translates into large bottom line savings of over a billion dollars. We confirm this difference using a variety of methods including matching procedures based on Near Neighbor, Gaussian, and Epanechnikov kernel The nucleus of an operating system. It is the closest part to the machine level and may activate the hardware directly or interface to another software layer that drives the hardware. based estimators (see Heckman, Ichimura, and Todd Todd , Sir Alexander Robertus 1907-1997.
British chemist. He won a 1957 Nobel Prize for his study of nucleic acids and nucleotide structures. , 1997, 1998), as well as regression regression, in psychology: see defense mechanism.
In statistics, a process for determining a line or curve that best represents the general trend of a data set. based yield estimators. This is an intriguing issue because it raises the question, how can an issuer with a junk bond rating (India's credit rating at that time) obtain such low yields (high prices)? And are there lessons inherent in this security design that can be replicated elsewhere?
There are a number of reasons why a niche clientele may value a security more. First, there may be a perceived difference in credit rating by the niche clientele. A second reason is that a niche clientele may value the underlying collateral in the potential default states more than other investors. (3) For example, India may default if it does not have enough foreign exchange reserves Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. , and it is plausible that they would pay in the local currency (Indian Rupees), which are not freely convertible into US dollars. Who values collateral in Indian Rupees more? Naturally, the Indians living abroad because they face a lower transaction cost in using the local currency (e.g., for purchase of real estate, jewelry jewelry, personal adornments worn for ornament or utility, to show rank or wealth, or to follow superstitious custom or fashion.
The most universal forms of jewelry are the necklace, bracelet, ring, pin, and earring. , family support payments etc.--see Appendix A for details). Thus the value in the potential default states, and hence the expected value Expected value
The weighted average of a probability distribution. Also known as the mean value. , ex ante is higher for this niche clientele. Finally, renegotiation costs are lower when a firm deals with a homogenous homogenous - homogeneous clientele in the default states. Gilson, John, and Lang Lang language
LANG Louisiana Army National Guard
Lang Langobardian (linguistics)
LANG Los Angeles Newspaper Guild (1990) provide related empirical evidence from the bankruptcy bankruptcy, in law, settlement of the liabilities of a person or organization wholly or partially unable to meet financial obligations. The purposes are to distribute, through a court-appointed receiver, the bankrupt's assets equitably among creditors and, in most literature, and show that firms with more layers of creditors are less likely to restructure privately, out of court, an alternative that is less expensive than a bankruptcy court bankruptcy court n. the specialized Federal court in which bankruptcy matters under the Federal Bankruptcy Act are conducted. There are several bankruptcy courts in each state, and each one's territory covers several counties. . Furthermore, these renegotiation costs are even lower if the niche clientele has reasons to value the underlying collateral more as suggested above.
The above mentioned reasons explain to some extent why a niche clientele has a higher expected valuation and is willing to pay more than other investor clienteles for the securities offered by the issuer. However, none of the above reasons by themselves explain why ownership restrictions are necessary. If the securities are offered freely, rational investors would take the above factors into account, resulting in the niche clientele holding the securities, and rendering the ownership restrictions unnecessary.
We present two alternative rationales for why ownership restrictions can be potentially valuable. The first one is that ownership restrictions allow for value enhancement through credible precommitments. To understand this rationale consider that the Indians living abroad clientele is an important one for India. They remit To transmit or send. To relinquish or surrender, such as in the case of a fine, punishment, or sentence.
An individual, for example, might remit money to pay bills.
TO REMIT. To annul a fine or forfeiture.
2. substantial foreign exchange, and can directly or indirectly vote in the political process. By restricting the security to a clientele that an issuer cares about, the issuer is able to precommit to treat this clientele more favorably fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. than other investors in an event of default. That is, ownership restrictions ensure that other investors do not free ride (see Grossman and Hart, 1980) on the favored clientele. Absence of ownership restrictions can lead to multiple classes of investors (due to potential free-riding) and dilute di·lute
To reduce a solution or mixture in concentration, quality, strength, or purity, as by adding water.
Thinned or weakened by diluting. an issuer's incentives to renegotiate efficiently in the potential default states. (4) Thus, ownership restrictions help an issuing firm to overcome this free-rider problem and make an effective precommitment to renegotiate efficiently in an event of default. More generally, where an investor clientele has a broader relationship with the firm, one that has dealings that extend beyond its current investment in the issuer's securities (e.g., the investor is a dependable provider of past and future capital and values the collateral more), the issuing firm is able to credibly cred·i·ble
1. Capable of being believed; plausible. See Synonyms at plausible.
2. Worthy of confidence; reliable. precommit to an efficient ex-post renegotiation by issuing securities exclusively to that investor clientele. This rationale is somewhat similar to loans made by the mafia, which are invariably in·var·i·a·ble
Not changing or subject to change; constant.
in·vari·a·bil repaid as the cost of non-repayment can be very high (e.g., loss of a leg). By taking loans from a clientele that is critical for continued success of a business, such as the mafia (or the Indians living abroad in our context--See Section III.C for details), there is an implicit ex-post commitment to repay the debt which translates into higher prices ex ante.
Thus, we argue that ownership restrictions enhance value since they enable an issuer to precommit to renegotiate efficiently in the potential default states (as discussed above, by eliminating incentives to free-ride by other investors), thereby circumventing the deadweight costs of prolonged negotiations, particularly when a security is restricted to a homogenous clientele that values the underlying collateral higher than other investors.
A second rationale is that ownership restrictions can result in a transfer of value from other securities. The reason why this occurs is that ownership restrictions influence the priority structure of claims (and indirectly affect the value of collateral), effectively making the restricted securities implicitly senior to the unrestricted securities. This can result in a transfer of value from unrestricted securities to restricted securities.
We empirically test to see if the transfer of value explains the yield differential. Specifically, we test for an implicit transfer of wealth from the existing bond holders to the new bond holders by conducting an event study of the effect of the issuance of the restricted bonds on prices of the unrestricted bonds. One needs to be careful here because such an effect might also come from a restricted debt capacity of the issuer, and of the sovereign nation, so that any new issue of debt securities leads to a decline in the pricing of existing debt securities. Hence, we also check if there is a differential effect between the issuance of new restricted bonds versus new unrestricted bonds on the prices of existing unrestricted bonds. We find a significantly higher price decline for the former case, i.e., for the issuance of new restricted bonds. This is consistent with a transfer of wealth to the holders of restricted bonds from the holders of unrestricted bonds of other Indian firms.
However, we find that some, but not all, of the yield differential is explained by value transfer associated with the implicit higher seniority of the restricted bonds. This suggests that ownership restrictions also enhance value potentially through lower renegotiation costs (since they circumvent cir·cum·vent
tr.v. cir·cum·vent·ed, cir·cum·vent·ing, cir·cum·vents
1. To surround (an enemy, for example); enclose or entrap.
2. To go around; bypass: circumvented the city. the deadweight costs of prolonged negotiations). We also examine whether our results can be rationalized by alternative explanations, such as a higher perceived credit rating, different measures of credit rating, (5) market segmentation Market Segmentation
A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. , (6) commissions, and taxes. We find that our results are robust to controlling for these alternative explanations.
In summary, we find evidence in support of both the enhancement of value and the transfer of value (from holders of unrestricted securities to restricted securities). Our evidence suggests that firms can benefit from designing securities with ownership restrictions, where securities are offered exclusively to niche clienteles who value them the most. A natural extension of the evidence contained in this experiment is that issuers from other emerging market countries such as China, Israel, and Korea could bypass traditional underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. routes to take advantage of their large expatriate Expatriate
An employee who is a U.S. citizen living and working in a foreign country. populations by devising securities that get them higher prices (and lower yields). More generally, firms with niche clienteles where the investor clienteles have a broader relationship with the firm (such as, also being customers or suppliers) can benefit from issuing securities with ownership restrictions. Overall, our analysis shows the wider ramifications ramifications npl → Auswirkungen pl of ownership restrictions than suggested in the literature, as an integral part of security design, in lowering (rather than raising) the cost of capital for the issuing firm.
Our article contributes to the literature on foreign ownership restrictions by showing that ownership restrictions can sometimes be value enhancing, whereas the extant literature Extant literature refers to texts that have survived from the past to the present time. Extant literature can be divided into extant original manuscripts, copies of original manuscripts, quotations and paraphrases of passages of non-extant texts contained in other works, largely shows that securities with ownership restrictions trade at a substantially lower price than comparable securities without restrictions.
The remainder of the article is organized as follows. Section I outlines our data and sample selection. Section II describes the measurement of yield differentials, along with some robustness checks. In Section III, we present an economic rationale for why some investors are willing to pay more than others for a security and whether the issuing firm can benefit from restricting the offering to them. Section IV empirically tests an implication of restricting the ownership of securities, namely whether there is a transfer of wealth from holders of unrestricted securities to holders of restricted securities. Section V concludes.
I. Data and Sample Selection
To examine the role of ownership restrictions in the security design problem, we conducted an indepth analysis of a natural experiment: multiple events of capital raising by an emerging market company with ownership restrictions, namely $4.2 billion of Resurgent re·sur·gent
1. Experiencing or tending to bring about renewal or revival.
2. Sweeping or surging back again.
Adj. 1. India Bonds and $5.5 billion of India Millennium Bonds offered by India's largest bank, State Bank of India, exclusively to Indians living abroad at approximately 150 basis points below comparable benchmarks.
We collected necessary data to confirm whether there is a significant yield difference between these bonds and comparable benchmarks, and additional data to test for sources of this yield differential. We obtained the data for our empirical analysis from several sources, such as the Securities Data Company's Global New Issues Database, the International Finance Corporation Emerging Markets Factbook, Datastream for historical price and yield data of bonds and bond indices, Moody's website for credit ratings, Dow Jones Dow Jones
the best known of several U.S. indexes of movements in price on Wall Street. [Am. Hist.: Payton, 202]
See : Finance News Service for assessing credit outlook, Federal Reserve Bank of Chicago's web site for current and historical interest rates, and the websites of the Reserve Bank of India The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. and the State Bank of India for information on Resurgent India Bonds and India Millennium Bonds.
Our sample selection procedure was as follows: First, we extracted the fixed-rate US dollar denominated non-convertible debt issues of foreign issuers from emerging markets (listed in the International Finance Corporation Emerging Markets Factbook) from the Securities Data Company's Global New Issues database that have a maturity of at least one year at the time of offering of the restricted bonds (i.e., Resurgent India Bonds or India Millennium Bonds). Second, we obtained price and yield information of these comparable sovereign and corporate bonds from Datastream. Third, we obtained Moody's credit rating (7) for Resurgent India Bonds, the India Millennium Bonds, and for the comparable bonds at the time of offering of the Resurgent India Bonds and the India Millennium Bonds. In addition, we incorporated additional information about the credit outlook on the issuer and whether the issuer's credit rating was under review for a potential upgrade or downgrade Downgrade
A negative change in the rating of a security.
For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. by searching Dow Jones News Services during the 12 months prior to the Resurgent India Bond or Millennium India Bond issue dates. Finally, to obtain yield spreads, we subtracted the yield on the Treasury of comparable maturity obtained from the Federal Reserve Bank of Chicago's web site.
We first test if there is a yield differential between the restricted securities (i.e., Resurgent India Bonds, and India Millennium Bonds) and the unrestricted securities (i.e., comparable bonds). Our main variable of interest is therefore YIELD SPREAD, defined as the ex ante yield of a debt security minus the ex ante yield of a US Treasury security of comparable maturity, measured in basis points. The independent variables for the regression results in Section II.C are as follows:
CREDIT RATING: Stands for a set of comprehensive credit rating dummy Sham; make-believe; pretended; imitation. Person who serves in place of another, or who serves until the proper person is named or available to take his place (e.g., dummy corporate directors; dummy owners of real estate). variables (B3, B2, B1, Ba3, Ba2, Ba1, Baa3, Baa2, Baa1, A3, A2, Aa3) based on Moody's comprehensive credit rating. (8) For example, Ba1 is a dummy variable This article is not about "dummy variables" as that term is usually understood in mathematics. See free variables and bound variables.
In regression analysis, a dummy variable which is one if Moody's comprehensive credit rating for the issue is Ba1. The dummy variable is zero otherwise.
MATURITY: The maturity of a debt issue measured in years at the time of offering of the Resurgent India Bonds or the India Millennium Bonds.
EXCHANGE: A dummy variable that takes a value of one ifa debt issue is traded on an exchange, and zero otherwise.
SOVEREIGN: A dummy variable that takes a value of one if a debt issue is a sovereign debt issue, and zero otherwise.
RESTRICTED: A dummy variable that takes a value of one for the Resurgent Indian Bond issue and for the Indian Millennium Bond issue, and zero otherwise.
B. Discussion of Variables
The economic rationale for using these variables is as follows: credit rating of a debt issue is clearly important and one would expect lower-credit rated issues to have higher yield spreads. Maturity is another variable potentially affecting yield spreads. In particular, if the probability of default Probability of default (PD) is a parameter used in the calculation of economic capital or regulatory capital under Basel II for a banking institution. This is an attribute of bank's client. increases with debt maturity (see Flannery, 1986) then we should expect to see higher yield spreads with longer maturity issues. A debt issue listed on an exchange is more liquid and is associated with more public information, and one would expect an exchange-listed debt issue to have a lower yield spread. Sovereign issuers, due to their ability to tax local corporations and individuals, need to be distinguished from corporate issues who do not have such authority. Finally, the size and sign of the coefficient coefficient /co·ef·fi·cient/ (ko?ah-fish´int)
1. an expression of the change or effect produced by variation in certain factors, or of the ratio between two different quantities.
2. of the variable RESTRICTED indicates whether or not the offering yield spread of the Resurgent India Bonds and the India Millennium Bonds is lower than that of comparable benchmark bonds.
II. Do Ownership Restrictions Depict de·pict
tr.v. de·pict·ed, de·pict·ing, de·picts
1. To represent in a picture or sculpture.
2. To represent in words; describe. See Synonyms at represent. a Lower Yield?
In this section, we analyze whether ownership restrictions can result in a lower yield for the issuing firm. Specifically, we examine whether the offering yield on the Resurgent India Bonds and the India Millennium Bonds is significantly lower than that of comparable bonds using a variety of matching procedures and regression specifications. We also examine how robust our finding of any yield differential is to alternative explanations such as a higher perceived credit rating, different measures of credit rating, market segmentation, taxes, and commissions. We focus our analysis of the offering yields in US dollar terms since the proceeds from these bond issues were predominantly pre·dom·i·nant
1. Having greatest ascendancy, importance, influence, authority, or force. See Synonyms at dominant.
2. in US dollars (e.g., 95% in case of Resurgent India Bonds).
See Table I for salient features of the Resurgent India Bonds and India Millennium Bonds. Both these bonds carry a semi-annual coupon and mature in five years. Two key features of these bonds are their yields, touted in the Indian financial press as being highly attractive and that they are offered exclusively to Indians living abroad, also known as "Non-resident Indians". (9) Both these bonds are illiquid Illiquid
An asset or security that cannot be converted into cash very quickly (or near prevailing market prices).
A house is a good example of an illiquid asset.
See also: Cash, Liquidity
In the context of finance. and are not traded on an exchange. However, transfer of ownership from one Non-resident Indian to another Non-resident Indian is possible through endorsement and physical delivery of the bonds. In this regard, the Resurgent India Bonds and India Millennium Bonds resemble standard bank deposits, albeit of a longer-maturity. Finally, these bonds are marketed on a best efforts basis through the branch networks of State Bank of India and of the collecting banks (who receive a commission based on the amount they collect) rather than sold to an underwriting syndicate Underwriting syndicate
A group of investment banks that work together to sell new security offerings to investors. The underwriting syndicate is led by the lead underwriter. See also: Lead underwriter.
See syndicate. of banks.
A. Univariate Results
Panel A of Table II presents the average yield spread for comparable debt issues, segmented based on the Moody's comprehensive credit rating on the day prior to the offering date of Resurgent India Bonds (i.e., August 4, 1998), and India Millennium Bonds (i.e., October 20, 2000). The average yield spread is the yield on a debt issue minus the yield on a US Treasury of comparable maturity, expressed in basis points. As can be seen, the average yield spread is 440 basis points for comparable debt issues with a Ba3 Moody's credit rating (same as that of State Bank of India's credit rating). However, the offering yield on Resurgent India Bonds and India Millennium Bonds was 231 and 281 basis points, respectively, which averages to 256 basis points, significantly lower than the estimated yield based on comparable debt issues of 440 basis points. This translates to an average yield saving of 184 (=440-256) basis points.
Panel B of Table II provides more detailed summary statistics of the comparable bonds, such as how many comparable bonds are from each country, average yield spread, average credit rating, average maturity, and the fraction of these bonds that are exchange-listed, and sovereign-grade. It is clear that the India-only sub sample is too small which limits us from making meaningful inferences on yield differentials using that sub sample. However, the summary statistics do provide an initial-cut on what to expect in subsequent results using regression methods and matching procedures. For example, Argentinean bonds with an average maturity of 4.91 years (relative to 5-year maturity of the restricted bonds), and an average numeric numeric
see ten-key pad. credit rating of 3.55 (relative to the numeric value of 4 associated with the Ba3 credit rating of State Bank of India) have an average yield spread of 391 basis points as compared to the 256 basis points of the restricted bonds. This results in an average yield saving of 135 (=391-256) basis points. The political economy of Argentina Argentina benefits from rich natural resources, a highly literate population, an export-oriented agricultural sector, and a diversified industrial base. Historically, however, its economic performance has been very uneven. and India have some similarities, such as a democratic rule of law, GDP GDP (guanosine diphosphate): see guanine. growth in high single-digits, high levels of government corruption, etc. Additionally, if we consider Turkey which has a similar credit rating as that of the restricted bonds, but a slightly higher maturity, the average yield savings is 324 (=580-256) basis points. Both choices of a comparable country for the benchmark bonds reveal a substantial yield savings associated with the restricted bonds.
Clearly, the yield savings (e.g., of 184 basis points based on Panel A of Table II) is only indicative since we must also control for the issue characteristics, such as the maturity of the issue, and whether the debt issue is traded on an exchange or not.
We proceed to control for the issue characteristics using two different approaches: 1) using a variety of matching procedures, such as the Near Neighbor, Gaussian, and Epanechnikov estimators (see Heckman, Ichimura, and Todd, 1997, 1998 for details), and 2) multivariate linear regressions.
B. Yields Computed by Propensity Scores and Matching Procedures
The formal econometric e·con·o·met·rics
n. (used with a sing. verb)
Application of mathematical and statistical techniques to economics in the study of problems, the analysis of data, and the development and testing of theories and models. methods of matching are developed in Rosenbaum and Rubin (1983), Heckman and Robb (1986), and Heckman, Ichimura, and Todd (1998). Below, we provide a summary of their results.
We consider the case where a bond can belong to one of two groups, numbered 1 and 0. Let D=1 denote de·note
tr.v. de·not·ed, de·not·ing, de·notes
1. To mark; indicate: a frown that denoted increasing impatience.
2. the treatment, which in this case is a restricted bond offering, such as the Resurgent India Bonds and India Millennium Bonds, and let D=0 represent the control, which is if the bond is unrestricted. In principle, the ith bond has both a price [Y.sub.1i] that would result if it had received treatment and another price [Y.sub.0i] that would result if it did not receive the treatment. The effect of interest is a mean effect of the difference between [Y.sub.1] and [Y.sub.0]. However, since we only observe [Y.sub.1] for our sample of restricted bonds, we have a missing data problem that cannot be solved at the level of the individual, so we reformulate Verb 1. reformulate - formulate or develop again, of an improved theory or hypothesis
formulate, explicate, develop - elaborate, as of theories and hypotheses; "Could you develop the ideas in your thesis" the problem at the population level. We focus on the mean effect of the difference between restricted bonds and unrestricted bonds with characteristics X:
(P - 1) E([Y.sub.1] - [Y.sub.0]|D = 1,X).
The mean E([Y.sub.1]|D = 1,X) can be identified from the data on restricted bonds. However, assumptions must be invoked to identify the unobservable counterfactual mean, E([Y.sub.0]|D = 1,X) The observable outcome of self-selected unrestricted bonds E([Y.sub.0]|D = 0,X) can be used to approximated E([Y.sub.0]|D = 1,X). The selection bias that arises from this approximation approximation /ap·prox·i·ma·tion/ (ah-prok?si-ma´shun)
1. the act or process of bringing into proximity or apposition.
2. a numerical value of limited accuracy. is:
B(X) = E([Y.sub.0]|D = 1,X) - E([Y.sub.0]|D = 0,X).
The method of matching solves the evaluation problem. Following Heckman and Robb (1986), we assume that all relevant differences between restricted and unrestricted bonds are captured by their observable characteristics X. Let:
(A - 1) ([Y.sub.0], [Y.sub.1]) [perpendicular to] D|X.
denoted the statistical independence of ([Y.sub.0], [Y.sub.1]) and D conditional on X. Rosenbaum and Rubin (1983) establish that when (A-1) and:
(A - 2) 0 < P(X)<1.
(which are referred to as the strong ignorability conditions) are satisfied, then ([Y.sub.0], [Y.sub.1]) [perpendicular to] D|P(X), where P(X) = Pr(D = 1|X). While it is often difficult to match on high dimension X, this result allows us to match based on the one-dimensional P(X) alone. P(X), known as the propensity score The introduction to this article provides insufficient context for those unfamiliar with the subject matter.
Please help [ improve the introduction] to meet Wikipedia's layout standards. You can discuss the issue on the talk page. , can be estimated using probit In probability theory and statistics, the probit function is the inverse cumulative distribution function (CDF), or quantile function associated with the standard normal distribution. or logit models.
Heckman et al. (1998) extend this result by showing that the strong ignorability conditions are overly restrictive for the estimation estimation
In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator. of (P-1). Instead, a weaker mean independence condition is all that is required:
(A-3) E([Y.sub.]0|D = 1, P(X)) = E([Y.sub.0]|D = 0, P(X)).
We use the Near Neighbor, Gaussian and Epanechnikov estimators discussed in Heckman, Ichimura, and Todd (1997, 1998). These estimators construct matches for each restricted bond by using weighted averages of the outcomes of multiple observations of the corresponding unrestricted bonds. Let [Y.sub.1i] be the yield spread of a restricted bond, and let [Y.sub.0j] be the yield spread of a corresponding unrestricted bond, and let [[bar.Y].sub.0j] represent the weighted average of yield spread of the unrestricted bonds.
The Near Neighbor method chooses for each restricted bond, the n non-restricted bonds with the closest propensity score. We specify n=10 and n=25 to obtain two separate estimates using the Near Neighbor method. We also use two different kernels to compute To perform mathematical operations or general computer processing. For an explanation of "The 3 C's," or how the computer processes data, see computer. [[bar.Y].sub.0j]. Specifically, if the weights from a typical symmetric No difference in opposing modes. It typically refers to speed. For example, in symmetric operations, it takes the same time to compress and encrypt data as it does to decompress and decrypt it. Contrast with asymmetric.
(mathematics) symmetric - 1. , non-negative, unimodal Adj. 1. unimodal - having a single mode
statistics - a branch of applied mathematics concerned with the collection and interpretation of quantitative data and the use of probability theory to estimate population parameters kernel K(.) are used, then the kernel places higher weight on bonds close in terms of P(X) and lower or zero weight on more distant observations. The Gaussian kernel is characterized char·ac·ter·ize
tr.v. character·ized, character·iz·ing, character·iz·es
1. To describe the qualities or peculiarities of: characterized the warden as ruthless.
2. by K(u) [varies] exp exp
2. exponential (-u/2). The Epanechnikov kernel only uses unrestricted bonds with a propensity score P([X.sub.0j]) that falls within the fixed bandwidth h of P([X.sub.1i]). When [absolute value of P([X.sub.1i]) - P([X.sub.0j])] < h and [absolute value of u] < 1, then the Epanechnikov kernel is K(u) [varies] (1 - [u.sup.2]). Otherwise the kernel has a value of zero. For each i, we compute [Y.sub.1i] - [[bar.Y].sub.0j]. Formally, for each [Y.sub.1i], we match a corresponding [[bar.Y].sub.0j] where
[[bar.Y].sub.0j] = [[summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument) ].sub.j]K(P([X.sub.1i]) - P([X.sub.0j])/h) [Y.sub.0j] / [[summation].sub.j]K (P([X.sub.1i]) - P([X.sub.0j])/h).
and h is a fixed bandwidth. To compute P(X), for each set of a single restricted bond and its corresponding unrestricted bonds, we run a logit or probit model In statistics, a probit model is a popular specification of a generalized linear model, using the probit link function. Probit models were introduced by Chester Ittner Bliss in 1935. :
RESTRICTED = [[beta].sub.0] + [[beta].sub.cr] CREDIT RATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + error.
where RESTRICTED takes a value of one for the restricted bonds, and zero otherwise, CREDIT RATING is the numerical numerical
expressed in numbers, i.e. Arabic numerals of 0 to 9 inclusive.
a numerical code is used to indicate the words, or other alphabetical signals, intended. counterpart counterpart n. in the law of contracts, a written paper which is one of several documents which constitute a contract, such as a written offer and a written acceptance. of the comprehensive credit rating of the bond as shown in Appendix B (e.g., Aaa = 16, Aa1 = 15, Aa2 = 14), MATURITY is the maturity of the bonds in years, and EXCHANGE takes a value of one if the bond is listed on an exchange, and zero otherwise. (10)
The results using the Near Neighbor, Gaussian, and Epanechnikov estimators for the pooled sample of the Resurgent Indian Bond issue, the India Millennium Bond issues, and the comparable benchmark bonds for both issues are summarized in Column 1 of Table III. The yield differential ranges between 145.27-223.15 basis points, which averages to 188.92 basis points (based on an equal-weighting of the estimates in Column 1 of Table III).
Next, we separately examine the estimated yield difference for the Resurgent India Bonds and the India Millennium Bonds using the Near Neighbor, Gaussian and Epanechnikov estimators. The results are summarized in Columns 2 and 3 of Table III. The estimated yield differential for the Resurgent India Bonds ranges from 115.40-201.20 basis points, which averages to 156.48 basis points (based on an equal-weighting of the estimates in Column 2 of Table III). (11) The estimated average yield differential for the India Millennium Bonds (based on an equal-weighting of the estimates in Column 3 of Table III) is higher at 247.95 basis points (range 145.33-334.13 basis points).
Overall, our empirical results in Table III based on the matching procedures described above indicate a yield differential in the range of 145.27-334.13 basis points, which averages to 197.78 basis points (based on an equal-weighting of all the estimates in Table III). We next examine estimates of yield difference using a variety of regression specifications, and compare them with estimates from the matching procedures.
C. Yields Computed by Regression Analysis In statistics, a mathematical method of modeling the relationships among three or more variables. It is used to predict the value of one variable given the values of the others. For example, a model might estimate sales based on age and gender.
We additionally check for yield differentials by means of a regression equation Regression equation
An equation that describes the average relationship between a dependent variable and a set of explanatory variables. , an approach often taken in the finance literature. For this purpose we run the following regression (see Section I.A for the definition of the variables):
YIELD SPREAD = [[beta].sub.0] + [[beta].sub.cr] CREDIT RATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + [[beta].sub.4] RESTRICTED + error. (1)
Column 1 of Table IV tabulates the regression results for the pooled sample of the Resurgent India Bond issue, India Millennium Bond issue, and the comparable benchmark bonds for both issues. The estimated yield spread for the Resurgent India Bond issue and the India Millennium Bond issue is lower by 170.90 basis points (based on the coefficient estimate of RESTRICTED) than that of comparable benchmark bonds after we control for the comprehensive credit rating, maturity, exchange listing, and whether it is a sovereign bond A sovereign bond is a bond issued by a national government. Bonds issued by national governments in the country's own currency are also referred as government bonds. , and this difference is statistically significant at the 1% level. (12)
We next run the regression in Equation (1) separately for the subsample sub·sam·ple
A sample drawn from a larger sample.
tr.v. sub·sam·pled, sub·sam·pling, sub·sam·ples
To take a subsample from (a larger sample). of the Resurgent India bond issue and the comparable benchmark bonds, and for the subsample of the India Millennium Bond issue and the comparable benchmark bonds. The regression results are tabulated in Columns 2 and 3 of Table IV. The estimated yield differential is 112.82 basis points for the Resurgent India Bonds and 316.14 basis points for the India Millennium Bonds, which averages to 214.48 basis points (based on an equal-weighting of the estimated yield differentials of the Resurgent India Bonds and that of the India Millennium Bonds in Columns 2 and 3 of Table IV).
Overall, the multivariate results in Table 1V indicate an estimated yield differential in the range of 112.82-316.14 basis points, which averages to 214.48 basis points (based on an equal weighting of the estimated yield differentials in Table IV).
In summary, based on our estimates from the univariate results, matching procedures and the multivariate results, the average yield differential is in the range of 184.00-214.48 basis points. To be conservative, we use 150 basis points as our estimated average yield differential for the remaining part of this article. The 150 basis points yield savings translates to a substantial bottomline savings of $1.08 billion. (13)
D. Alternative Explanations
We examine whether the yield differential can be explained by other factors, such as potential inaccuracies of credit ratings, market segmentation, taxes, and commissions.
1. Potential Inaccuracies of Credit Ratings
We analyze the robustness of our results to potential inaccuracies of credit ratings in two different ways. First, we consider two other alternative measures of the bond issuer's credit rating, namely the International Country Risk Guide (ICRG ICRG International Country Risk Guide ) composite credit rating, and the Institutional Investor Institutional Investor
A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. (II) country credit rating for the bond issuer. (14) A few differences between these alternative credit rating measures that we use here and the Moody's credit rating is that the alternative measures are numeric (a higher number implies a better credit rating) rather than a letter rating (as in the case of Moody's), and are available as a time series (monthly for ICRG, and bi-annual for II ratings, rather than at specific points of time when Moody's changes a bond's rating). We replace our credit rating dummies in the regression in Column 1 of Table IV with the ICRG composite credit rating for the Resurgent India Bonds, the India Millennium Bonds and the comparable bonds at the time of issuance of the Resurgent India Bonds and India Millennium Bonds. The results are reported in Panel A of Table V. The RESTRICTED variable continues to be negative (with a similar economic magnitude as in Column 1 of Table IV) and is statistically significant at the 1% level. The results are qualitatively similar when we replace the credit rating dummy variables in the regression in Column 1 of Table IV with the II country credit rating for the Resurgent India Bonds, the India Millennium Bonds and the comparable bonds at the time of issuance of the Resurgent India Bonds and India Millennium Bonds (see Panel B of Table V).
Second, if we reestimate the regression in Column 1 of Table IV using Moody's comprehensive credit rating of Ba1 (prior to June 19, 1998) (15) for the RIB rib, one of the slender, elongated, curved bones that compose the chest cage in higher vertebrates. Ribs occur in pairs, and are found in most vertebrates; however, in some lower vertebrates, including fishes, they run along the entire length of the backbone. issue, the results are qualitatively similar (the RESTRICTED variable has a coefficient of -202.57 basis points and is statistically significant at the 1% level). Moreover, even if we reestimate the regression in Column 1 of Table IV simply using the explicit credit rating (ignoring the credit watch information) of Baa3, the RESTRICTED variable has a coefficient of -95.15 basis points, significant at the 1% level. (16)
The evidence suggests that even after taking into potential inaccuracies of credit ratings as detailed above, the restricted bonds still yield about 100 basis points lower than comparable benchmarks.
2. Market Segmentation
One could argue that the yield differential we document in this article is driven by market segmentation. We analyze the market segmentation explanation in three ways. First, even if bonds are denominated in hard currencies, the inflation rate of the home country may play a role, as local investors in a high inflation economy may aggressively seek investments in hard currencies. In such a situation, a segmentation or demand driven explanation might explain the yield differential, and not ownership restrictions. (17) To test this view, we include the lagged annual inflation rate at the time of the restricted bond issue obtained from the World Economic Indicators Economic indicators
The key statistics of the economy that reveal the direction the economy is heading in; for example, the unemployment rate and the inflation rate. database in our regression in Column 1 of Table IV. The results, reported in Column 1 of Table VI are qualitatively similar to those in Column 1 of Table IV.
Second, despite the fact that ownership restrictions typically increase market segmentation of the local capital markets, the market wide segmentation in India may be still less restrictive relative to other nations, e.g., due to India's size. Consequently, the broader notion of economy wide segmentation across nations might still predict that India's bonds yield less than similar bonds in other nations, and the segmentation that arises from ownership restrictions might not be sufficiently large In mathematics, the phrase sufficiently large is used in contexts such as:
Finally, we examine if there is any direct evidence of an increase in market wide segmentation (i.e., a decrease in the market integration of India's capital markets with the rest of the world) in India after the issuance of the restricted bonds. Specifically, we do not see any increase in market segmentation for India during 1998-2000 as evidenced in the graphs on time-varying market integration of India in Bekaert and Harvey (1995), and in Bekaert, Harvey, and Lundblad (2003).
Our evidence shows that even after taking into consideration differences in economy wide segmentation across nations, the restricted bonds still yield about 120 basis points lower than comparable benchmarks.
One could argue that the motivation for issuing Resurgent India Bonds or India Millennium Bonds is to provide implicit tax Implicit tax
Lower or higher before-tax required returns on assets that are subject to lower or higher tax rates. benefits (18) to the transferees, e.g., family members of the Nonresident non·res·i·dent
1. Not living in a particular place: nonresident students who commute to classes.
2. Indians, which will be reflected in the lower yields for Resurgent India Bonds and India Millennium Bonds as compared to benchmark securities. For instance, Resurgent India Bonds may be gifted to a domestic resident, such as a family member in India without any gift tax in India. (19) However, the gift tax was repealed on July 21, 1998 for all Indians (not just Non resident Indians), a few months prior to the issue date of the Resurgent India Bonds. Clearly, this cannot explain the yield difference.
Given that Resurgent India Bonds and the India Millennium Bonds are exempt from Indian taxes for original holders (see Table I), one might argue that the effective yield, on an equivalent pre-tax basis is much higher, perhaps closer to the yield on a comparable benchmark. However, the comparable bonds, which mostly trade in the euro bond market (e.g., London and Luxembourg) enjoy a similar tax benefit due to tax anonymity and absence of withholding Withholding
Any tax that is taken directly out of an individual's wages or other income before he or she receives the funds.
In other words, these funds are "withheld" from your wages. taxes. In addition, given that approximately 50% of the Resurgent India Bond inflows and the India Millennium Bond inflows came from the Middle East with zero taxes further negates this hypothesis.
A collecting bank Collecting Bank
A bank that assists in obtaining payment in accordance with draft payment terms. , to gain a larger share of the Resurgent India Bond issue or the India Millennium Bonds issue may choose to keep only a small part of the commission (e.g., 0.25% to 0.50%) and pass on the rest of the commission to Non-resident Indian investors as an investment incentive. (20) Naturally, this increases the effective yield on the Resurgent India Bonds and the India Millennium Bonds since the price paid is the nominal amount minus the commission kickback. In computing computing - computer the effective yield, we assume the most aggressive kickback strategy, namely to part with the entire commission (capped at 1.5% in case of Resurgent India Bonds). It turns out that the effective yield, taking into account the commission kickback of 1.5% up front for the Resurgent India Bonds is 8.12% (21), approximately 37 basis points higher than the coupon of 7.75%. However, that still leaves it approximately 113 basis points (= 150-3 7) lower than yields on comparable debt issues. Similar analysis can be conducted for the India Millennium Bonds, and results are qualitatively unchanged. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , the commission kickbacks account for only a small part of the difference in yields between Resurgent India Bonds or India Millennium Bonds and their comparable benchmark securities.
In summary, the empirical results suggest that the offering yield on the Resurgent India Bonds and India Millennium Bonds is significantly lower than that of comparable securities, and that this finding is robust to alternative explanations, such as a higher perceived credit rating, different measures of credit rating, market segmentation, taxes, and commissions.
III. Economic Rationale for Ownership Restrictions
In this section, we present the intuition intuition, in philosophy, way of knowing directly; immediate apprehension. The Greeks understood intuition to be the grasp of universal principles by the intelligence (nous), as distinguished from the fleeting impressions of the senses. behind why an investor clientele might be willing to pay more for a security than other investors and examine whether there are any benefits to the issuing firm in restricting the offering to the investor clientele.
A. Reasons for a Higher Valuation by an Investor Clientele
One reason for a higher valuation by an investor clientele relative to that of other investors is that it has a broader relationship with the issuer and values the collateral (i.e., what an investor gets in exchange for extinguishing his or her claim) in the potential default states higher than other investors.
In the context of the Resurgent India Bonds and India Millennium Bonds, the investor clientele (Non-resident Indians) face a much lower transaction cost in utilizing the collateral in the local currency (Indian Rupees, a currency that is not freely convertible) than foreign investors as they have a economic need for utilizing rupees. (22) For instance, Non-resident Indians have been known to provide financial assistance for their parents and other family members living in India, buy residential and business properties, operate businesses in India and invest in securities of local companies, and these transactions are facilitated directly or indirectly through the banking network of the State Bank of India (see Appendix A).
An example of a similar difference in the value of the collateral is between a car dealership, such as the BMW BMW
in full Bayerische Motoren Werke AG
German automaker. Founded as an aircraft engine manufacturer in 1916, the company assumed the name Bayerische Motoren Werke and became known for its high-speed motorcycles in the 1920s. or Lexus and a bank. The car dealership is in a position to offer a lower interest rate than a bank on a car lease because it has a ready market for its cars after the lease period in the form of the "certified pre-owned A Certified Pre-Owned or CPO, car is a type of used car. Most often late-model, they differ from run of the mill used cars by having been refurbished, and certified by the original dealer as being as good as new. " program. That is, the car dealership incurs a significantly lower transaction cost on utilizing the collateral (i.e., the leased car that is returned to the dealership on expiry of the lease).
B. Benefits in Restricting Securities Offering to an Investor Clientele
A related issue is that even if an investor clientele is willing to pay more for a security than other investors, why would the issuing firm restrict the offering of the securities to the investor clientele? Investors who value the security should self select in buying the security making such restrictions unnecessary.
We present a number of economic reasons why ownership restrictions are potentially beneficial. Generally, these fall under two broad categories: real savings or enhancement of value, and transfer of value (from holders of other securities).
First, ownership restrictions can result in an enhancement of value. The issuing firm incurs lower renegotiation costs in the event of a default when it renegotiates with only one homogenous class of investors (the investor clientele) rather than with multiple classes of investors. Gilson et al. (1990) provide empirical evidence that is consistent with this viewpoint in a study of 169 financially distressed firms during 1978-1987. They show that firms with more layers of creditors are less likely to restructure out of court and save a costly bankruptcy procedure. Second, the ex ante restriction can also serve as a precommitment device to facilitate an efficient ex-post renegotiation in the potential default states with the investor clientele because of the broader relationship that the investor clientele has with the issuer (i.e., dealings that extend beyond its current investment in the issuer's securities). This rationale is somewhat similar to loans made by the mafia, which are invariably repaid as the cost of non-repayment can be very high (e.g., loss of a leg). By taking loans from a clientele that is critical for continued success of a business, such as the mafia (or the Non-resident Indians in our context--See Section III.C below), there is an implicit ex-post commitment to repay the debt which translates into higher prices ex ante. Absent ownership restrictions other investors may wish to free-ride (see Grossman and Hart, 1980) on the investor clientele's ability to obtain a favorable fa·vor·a·ble
1. Advantageous; helpful: favorable winds.
2. Encouraging; propitious: a favorable diagnosis.
3. negotiation in the default states. This in turn can lead to multiple classes of investors and dilutes the issuer's incentives to renegotiate efficiently in the potential default states. Ownership restrictions help firms overcome this free-rider problem and make an effective precommittment to renegotiate efficiently in an event of default.
Second, ownership restrictions can result in a transfer of value from unrestricted securities to restricted securities. The reason why this occurs is that ownership restrictions can influence the priority structure of claims (and indirectly affect the value of collateral), as explained above (e.g., in the context of loans from a clientele that is critical for continued success of a business), effectively making the restricted securities implicitly senior to unrestricted securities (see Section IV for some evidence on such wealth transfers). Both these effects (value enhancement and value transfer) imply that the investor clientele bids a higher price (accepts a lower yield) when the offering of securities is restricted to them.
In the context of the Resurgent India Bonds and India Millennium Bonds, the restriction serves as a precommitment device to facilitate a efficient renegotiation for the Non-resident Indians. Given State Bank of India's pivotal role in India's economy (see Appendix A for details), it may be considered "too big to fail" and consequently, one would expect that the Government of India The Government of India (Hindi: भारत सरकार Bhārat Sarkār), officially referred to as the Union Government, and commonly as Central Government will play a major role in a potential renegotiation. (23) In such a situation, the restriction ensures that the Government of India has the right incentives to renegotiate efficiently with the Non-resident Indians for the fear of losing potentially valuable stable and recurring re·cur
intr.v. re·curred, re·cur·ring, re·curs
1. To happen, come up, or show up again or repeatedly.
2. To return to one's attention or memory.
3. To return in thought or discourse. foreign exchange inflows, jobs in businesses owned by the Non-resident Indians and electoral votes. Such a precommitment to an efficient ex-post renegotiation makes the restricted bonds (i.e., Resurgent India Bonds and India Millennium Bonds) implicitly senior to unrestricted bonds (i.e., foreign currency denominated bonds issued by Indian companies), and potentially result in a wealth transfer from holders of unrestricted bonds to restricted securities. We present some evidence on such wealth transfers in the next section. Overall, the lowering of renegotiation costs and the commitment to renegotiate favorably in the potential default states, ex-post, translates into higher prices (lower yields) ex ante.
C. Are Indians Living Abroad Critical to the Success of India's Economy?
Indians living abroad, also known as the Non-resident Indians play a critical role in ensuring the success of India's economy. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is part of The Economist Group. It is a research and advisory company providing country, industry and management analysis worldwide and incorporates the former Business International Corporation, a U.S. Country Report for India as of the 4th quarter of 1999 (EIU EIU Economist Intelligence Unit
EIU Eastern Illinois University
EIU Even If Used
EIU Experimental Interaction Unit
EIU Engine Interface Unit
EIU Ethernet Interface Unit
EIU Electronic Interface Unit
EIU External Interface Unit , 1999), "Non-resident Indians (NRIs) have been the main stay of the Indian balance of payments for the past 25 years. (24) Annual inflows of remittances
Remittances are transfers of money by foreign workers to their home countries. and investments have helped India through two oil shocks, and shielded the economy from the weaknesses of merchandise trade account." In a recent country report as of March 2005 (EIU, 2005), "Figures released by the Ministry of Finance (of India) show that, of India's external debt of US$113.6bn (in billions) at end-September 2004, US$30.6bn was owed to non-resident Indians (NRIs) ..." making them India's largest creditor, ahead of multilateral debt of US$30.1 billion, the second largest creditor.
Kapur (2004a) suggests that the Non-resident Indians have a significant influence on public policy in India. For example, in 2000 the government of India constituted a group comprising select non-resident Indians to formulate formulate /for·mu·late/ (for´mu-lat)
1. to state in the form of a formula.
2. to prepare in accordance with a prescribed or specified method. a global strategy for India. This group advised the government on information-technology (IT) policies, telecom infrastructure, guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. on venture capital funds Venture Capital Funds
An investment fund that manages money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Notes: , and issues related to IT education. On a general note, meetings with the Non-resident Indian community has become socially obligatory for politicians from India, with the Non-resident Indians from the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. being most important in this respect. Some of these meetings resulted in immediate policy changes, such as the introduction of automatic clearing scheme for foreign direct investment proposals, under which a proposal is deemed to be cleared if it did not receive a negative response from the Reserve Bank of India within a short period of time (as opposed to waiting to hear of a positive response), and allowing importation of many capital goods Capital Goods
Any goods used by an organization to produce other goods.
Examples of capital goods include office buildings, equipment, and machinery.
See also: Capital Expenditure, Disinvestment
Capital goods without the requirement of a license from the government. In a related study, Kapur (2004b) documents that the probability that a household in India has members abroad sharply increases with socioeconomic classification, defined in terms of income level and professional background, and that the households in the highest socioeconomic classification--nearly a quarter of households in India--have immediate or extended family members abroad. The extent of influence that the overseas members (i.e., Non-resident Indians) have on the domestic counterparts has in recent times been further amplified by the ease of travel and communication.
Finally, Walton-Roberts (2004) argues that globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation processes have encouraged a renewed national interest with Non-resident Indians as a force to assist India to engage with the global economy. Also, see Appendix A for additional details.
In essence, the Indians living abroad are extremely critical for the success of India's economy, as evidenced in their role in influencing India's balance of payments situation (e.g., in helping maintain adequate foreign exchange reserves and current account surpluses), as India's largest creditor, and in engaging India with the global economy.
IV. Empirical Evidence on Implicit Seniority and Wealth Transfers
In the previous section we hypothesized two reasons for lower yields on restricted securities: enhancement of value and transfer of value. Value enhancement can arise by designing a security to circumvent the deadweight costs of prolonged negotiations, particularly when a security is restricted to a homogenous clientele that values the underlying collateral higher than other investors in the default states. Transfer of value can occur from existing security holders to the new security holders.
We next test for the value transfer effects by employing an event study to determine whether there is a price decline in other foreign currency denominated bonds issued by other Indian companies upon the announcement of the restricted bonds. Specifically, we test whether the implicit seniority, as evidenced by a price decline in other foreign currency denominated securities issued by Indian companies fully explains the difference in yields between the Non-resident Bonds and the comparable benchmarks documented in Section II. This takes a more general view that the restricted bonds may be implicitly senior to the foreign currency denominated unrestricted bonds of all Indian companies (and not just the State bank of India) as one may expect that the Government of India plays an important role in a renegotiation in the potential default states since the State Bank of India may be considered "too big to fail".
A. Evidence of Implicit Seniority
The required data for the event study is obtained from Datastream. Our sample for the event study consists of 32 foreign currency denominated debt securities (e.g., US dollar denominated bonds, non-US dollar foreign currency bonds, fixed-rate non-convertible bonds, and fixed-rate convertible bonds etc.) issued by Indian companies listed on an exchange for which daily price data (to compute the daily returns) was available on Datastream. We use market adjusted returns, where the market index is the J.P. Morgan Emerging Markets Index (JPMEMBI), also obtained from Datastream. Following Brown and Warner (1985), we use the following event study methodology:
(2) [A.sub.i,t] = [R.sub.i,t] - [R.sub.m,t],
where the event date, i.e., day 0 is defined as announcement dates of June 2, 1998 for Resurgent India Bonds and October 9, 2000 for India Millennium Bonds. The announcement dates were obtained from Dow Jones Newswires Dow Jones Newswires is the real-time financial news organization owned by Dow Jones. Founded in 1882, its primary competitors are Bloomberg L.P. and Reuters. The company reports more than 420,000 subscribers -- including brokers, traders, analysts and fund managers -- as of July , being the first date of a credible mention of these bond issues during time period that is one year prior to the issue date of these bonds. [R.sub.i,t] is the observed arithmetic return for security i at date t, [R.sub.m,t] is the observed arithmetic return for the market index at date t, and [A.sub.i,t] is the excess return for security i at day t.
The market-adjusted average abnormal return Abnormal Return
When the return on an asset or security is in excess of the expected rate of return.
Earning 30% in a mutual fund that is supposed to average 10% would be an abnormal return. Much like winning the lottery, this is something we want to happen. on the event day is -1.40%, statistically significant at the 1% level (See Column 1 of Table VII). We next examine whether the negative price reaction is pervasive pervasive,
adj indicates that a condition permeates the entire development of the individual. across both the restricted bonds.
Columns 2 and 3 of Table VII presents the announcement effect segmented by the type of the Non-resident Indian bond, namely for the Resurgent India Bonds and India Millennium Bonds separately. The market-adjusted average abnormal return on the event day is -1.59% and -0.99% for the announcement of the Resurgent India Bonds and India Millennium Bonds respectively, each of which is statistically significant at the 5% level. In other words, there is a similar negative price reaction for each of these restricted bonds, albeit the magnitudes of these price reactions are different.
Overall, the evidence of wealth transfers from unrestricted bonds to restricted bonds presented here is consistent with an implicit seniority of the restricted bonds vis-a-vis the unrestricted bonds. However, one needs to be careful here because such an effect might also come from restricted debt capacity of the issuer or of the sovereign nation, so that any new issue of debt securities leads to a decline in the pricing of existing debt securities. We turn our attention to this issue next.
B. Comparison Against Other Debt Issuance Effects
We presented evidence of a wealth transfer from unrestricted bonds to restricted bonds in Section IV.A. We examine the robustness of this result by investigating whether it is driven by the debt capacity constraint Constraint
A restriction on the natural degrees of freedom of a system. If n and m are the numbers of the natural and actual degrees of freedom, the difference n - m is the number of constraints. of the issuer or more generally of the sovereign nation (India). Specifically, if the overall debt capacity of the issuer and of the sovereign nation is constant (e.g., in the short-term), any new debt issue (whether restricted or unrestricted) would have negative implications for existing debt. Consequently, if we do not see a difference in the price reaction on existing unrestricted bonds upon announcement of issuance of new restricted bonds versus issuance of new unrestricted bonds, then we cannot attribute a wealth transfer due to ownership restrictions.
If we assume a constant debt capacity for India, at least in the short-term, one could argue that there is likely a negative price reaction (similar to the one documented above) for all foreign currency denominated bond issues by Indian issuers. If so, one could infer evidence consistent with implicit seniority only if the price decline documented in Section IV.A is higher than what one would expect for any foreign currency (unrestricted) bond issue. We conduct an event study (similar to the one in Section IV.A) to measure the price reaction associated with announcement of foreign currency bonds of Indian issuers on outstanding foreign currency bonds of other Indian issuers. As before, the announcement dates correspond to the first credible mention about the debt issue in Dow Jones Newswires during a time period that is one year prior to the issue date. The market-adjusted abnormal return, is significantly less (-0.33% versus -1.40%), suggesting that there is a transfer of wealth from the existing unrestricted bonds to new restricted bonds in excess of the effect associated with a new unrestricted bond issue.
Consequently, we view that our evidence of a significantly higher price decline for the issuance of new restricted bonds vis-a-vis new unrestricted bonds on existing unrestricted bonds, namely a transfer of wealth to restricted bonds from holders of unrestricted bonds, is consistent with implicit seniority of the restricted bonds.
C. Yield Differentials and Implicit Seniority
We next examine whether the implicit seniority, as evidenced by a price decline in other foreign currency denominated securities issued by Indian companies fully explains the difference in yields between the Non-resident Bonds and comparable benchmarks.
To estimate the value loss from implicit seniority of the Non-resident Indian Bonds, we multiply the average price decline on the event day (e.g., in Column 1 of Table VII) with the amount of foreign currency denominated securities issued by Indian companies that are outstanding on the event date. We find that the value loss on the event day is $127.07 million (corresponding to Column 1 of Table VII), significantly lower than the present value of interest savings of $722.07 million pertaining per·tain
intr.v. per·tained, per·tain·ing, per·tains
1. To have reference; relate: evidence that pertains to the accident.
2. to the yield differential. (25) Note that this is gross value loss based on the negative announcement effect of -1.40% that we document in Section IV.A. If we were to compute the net value loss (netting off the -0.33% negative announcement effect that we document in Section IV.B for new unrestricted bonds) this is lower at $97.12 million.
D. Robustness Test
The above evidence does not control for the size of each new bond issue, as well as the influence of the limited number of bond issues on the standard errors for the announcement returns associated with them. In other words, if the results are driven by finite finite - compact issuance (i.e., constant debt capacity for India), larger new bond issues (restricted or unrestricted) will have larger negative impact on bond yields, and it is plausible that the inferior INFERIOR. One who in relation to another has less power and is below him; one who is bound to obey another. He who makes the law is the superior; he who is bound to obey it, the inferior. 1 Bouv. Inst. n. 8. (i.e., more adverse) announcement returns associated with restricted new bond issues arises simply because they are larger than unrestricted issues. To test for this, we regress REGRESS. Returning; going back opposed to ingress. (q.v.) the abnormal announcement return of the unrestricted bonds in response to the announcement of a new bond issue on: a) the size of the each new bond issue, b) the size of the unrestricted bond whose abnormal bond price reactions is being measured, c) an indicator variable RESTRICTED for whether the new bond issue is restricted or not, and d) fixed effects for the new bond issues. The results, reported in Table VIII are stronger once we control for these additional effects the indicator variable RESTRICTED is negative and statistically significant at the 1% level, and the explanatory ex·plan·a·to·ry
Serving or intended to explain: an explanatory paragraph.
ex·plan power of this regression is relatively high. In other words, after we control for the size of the new bond issue, and include fixed effects for each new bond issue, there is strong evidence of a transfer of value from the holders of other unrestricted bonds to the holders of restricted bonds, consistent with an implicit seniority of the restricted bonds vis-a-vis the unrestricted bonds. Nevertheless, the value loss from the implicit seniority of the restricted bonds is still substantially lower than the present value of interest savings from the yield differential of the restricted bonds.
Based on the above, we conclude that the implicit seniority of the Non-resident Indian bonds alone accounts for some but not all the difference in yields between the Non-resident Indian Bonds and comparable benchmarks. (26) This suggests that in addition to the transfer of value, there is potentially value enhancement from some of the factors we discussed such as real savings from lower renegotiation costs.
In this article, we examine the role of ownership restrictions in raising capital from niche clienteles. We argue that ownership restrictions must be viewed broadly in the context of security design since they have direct implications for the renegotiation costs and the value of collateral. We show that restricting ownership of securities can be beneficial in lowering (rather than raising) the cost of capital of an issuing firm.
We argue that ownership restrictions may enhance value as well as transfer value from holders of other securities. Ownership restrictions can enhance value by circumventing the deadweight costs of prolonged negotiations, particularly when a security is restricted to a homogenous clientele that values the underlying collateral higher than other investors. Restricting the ownership to a homogenous class of investors lowers the renegotiation costs and serves as a precommitment to ensuring an efficient ex-post renegotiation in the potential default states, resulting in a lower ex ante offering yield (and a higher offer price). This also results in an implicit seniority of holders of these restricted bonds vis-a-vis holders of unrestricted bonds. We empirically test and find support for both value enhancement and value transfer from ownership restrictions.
Many other emerging market firms can also benefit from designing securities with ownership restrictions where the new securities are offered only to investors who value them the most. For example, firms from emerging markets with large expatriate populations, such as China, Israel and Korea could bypass traditional underwriting route and devise securities that could get them higher prices (and lower yields). Similarly, for many other firms, e.g., hi-tech firms, where customers are also investors, and hence have a broader relationship with the firm, there can be benefits to ownership restrictions. Overall, our analysis shows the wider ramifications of ownership restrictions than suggested in the literature, as an integral part of security design, in lowering (rather than raising) the issuer's cost of capital.
Appendix A. Brief Overview of India, State Bank of India, and the Non-Resident Indians
This appendix outlines a brief overview of India, State Bank of India's history, its role in India's economy, explains the characteristics of the Non-Resident Indians, and their role in India's economy.
A. Brief Overview of India
India is the largest democratic nation in the world and the second largest country in terms of population (next only to China) with approximately one billion people. India gained its independence from the British in 1947. For a large part of the post-independence period, India has been governed gov·ern
v. gov·erned, gov·ern·ing, gov·erns
1. To make and administer the public policy and affairs of; exercise sovereign authority in.
2. by the Congress party. Principal among India's leaders were Jawahar Lal Nehru, his daughter, Indira Gandhi Noun 1. Indira Gandhi - daughter of Nehru who served as prime minister of India from 1966 to 1977 (1917-1984)
Gandhi, Indira Nehru Gandhi, Mrs. Gandhi , and her son, Rajiv Gandhi Rajiv Ratna Gandhi राजीव गाधीं (IPA: [raːdʒiːv gaːnd̪ʰiː] . Economic reforms since 1991 has led to a strong economic growth of the Indian economy. The result of these reforms has been moderate rates of inflation, an increase in the foreign exchange reserves, a modest balance of payments deficit, higher investment flows and a higher growth in trade.
Most of India is in the villages and the urban population accounts for only a fourth of the total population. More than a third of the population still lives below the poverty line and nearly half of the population is illiterate ILLITERATE. This term is applied to one unacquainted with letters.
2. When an ignorant man, unable to read, signs a deed or agreement, or makes his mark instead of a signature, and he alleges, and can provide that it was falsely read to him, he is not bound by . However, India has a burgeoning middle class whose population equals that of the European community and is the target market of the manufacturers of many international consumer brands. While the fundamentals of India's economy have been moving in the right direction, the economy is still hampered by inadequate infrastructure, high interest rates, and a large fiscal deficit.
B. State Bank of India's history and Its Role in India's Economy
The origins of the State Bank of India dates to 1806 when the Bank of Calcutta The Bank of Calcutta was founded on June 2, 1806, mainly to fund General Wellesley's wars against Tipu Sultan and the Marathas. It was renamed Bank of Bengal on January 2, 1809. (later called the Bank of Bengal) was established. In 1921, the Bank of Bengal and two other banks (Bank of Madras The Bank of Madras, one of the three Presidency Banks, the other two being, the Bank of Bengal and the Bank of Bombay, was established on 1st July 1843, and was headquartered in Madras, now Chennai. and Bank of Bombay Bank of Bombay was the second of the three presidency banks (others being the Bank of Calcutta and the Bank of Madras) of the Raj period. It was established, pursuant to a charter of the British East India Company, in the year 1868, about a decade after India's First War of ) were amalgamated a·mal·ga·mate
v. a·mal·ga·mat·ed, a·mal·ga·mat·ing, a·mal·ga·mates
1. To combine into a unified or integrated whole; unite. See Synonyms at mix.
2. to form the Imperial Bank of India The Imperial Bank of India (IBI) was the oldest and the largest commercial bank of the Indian subcontinent, and was subsequently transformed into State Bank of India in 1955. . In 1955, the controlling interests of the Imperial Bank of India were acquired by the Reserve Bank of India (the equivalent of the Federal Reserve Bank in the United States), and the State Bank of India was created by an act of the Parliament to succeed the Imperial Bank of India. The Reserve Bank of India, which has supervisory control Supervisory control is a general term for control of many individual controllers or control loops, whether by a human or an automatic control system, although almost every real system is a combination of both. over the banking system in India, is also the single largest shareholder of State Bank of India (with 59.73% share holding). Consequently, some market participants tend to view State Bank of India as quasi-sovereign risk.
State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. As of March 31, 1998, State Bank of India possessed total assets worth USS USS
1. United States Senate
2. United States ship
USS abbr (= United States Ship) → Namensteil von Schiffen der Kriegsmarine 45,487 million and total deposits worth USS 33,188 million. With a network of 8,895 branches in India and 52 foreign offices in 34 countries, State Bank of India commands about one-fifth of the total deposits and loans in the country. State Bank of India's shares and bonds are listed for trading on all the major Indian stock exchanges and State Bank of India has one of the largest market capitalizations of all companies traded on such exchanges.
State Bank of India plays a key role in India's economy through its product set that covers consumer lending Consumer lending or consumer loans refers to any type of loan product that is not a mortgage; such as a car, boat, manufactured home, home equity loan, home equity line of credit, signature loan, signature line of credit, recreational vehicle, or Certificate of Deposit loans. , working capital financing, infrastructure lending, merchant banking, government securities dealing, and priority lending (e.g., agriculture and small business sectors of the economy). In addition, due to State Bank of India's extensive branch network, almost every villager in India has an account with State Bank of India. In other words, approximately three-fourths of India's population which lives in the villages relies extensively on State Bank of India for their banking services.
State Bank of India is an active player in the Non-resident Indian market through its short to medium term foreign currency deposits (which range from three months to three years) and accounts, denominated either in foreign currency or in Indian Rupees. Long considered the flagship of Indian banking, State Bank of India is also the privileged financial intermediary Financial Intermediary
An institution that acts as the middleman between investors and firms raising funds. Often referred to as financial institutions.
This can include chartered banks, insurance companies, investment dealers, mutual funds, and pension funds. of the Indian government in raising sovereign debt.
C. Role of Non-Resident Indians in India's Economy
There are estimated to be approximately 9.6 million Non-resident Indians in the world. Non-resident Indians have certain distinguishing characteristics. First, many of the Nonresident Indians provide financial assistance to their parents, siblings siblings npl (formal) → frères et sœurs mpl (de mêmes parents) and relatives living in India. Second, Non-resident Indians intend to return to India in the future, e.g., if there is a crisis in the foreign country, such as the invasion of Kuwait The Invasion of Kuwait, also known as the Iraq-Kuwait War, was a major conflict between the Republic of Iraq and the State of Kuwait which resulted in the 7 month long Iraqi occupation of Kuwait by Iraq in early 1990s, or after their children go to college, or after retirement. Finally, driven by their experiences abroad, Non-resident Indians desire to make fundamental changes in India's economy. To meet the above mentioned objectives, Non-resident Indians have been known to send money to their parents, siblings and relatives living in India, buy property in India, own businesses in India, own stocks and bonds in local companies in India, and contribute significant amounts to charitable organizations in India.
Non-resident Indians play a critical role in India's economy in several ways. First, as a provider of recurring and stable foreign currency cash inflows. Appendix D presents the outstanding balances under various Non-resident Indian deposits and accounts as of March 31,2001. Interestingly, a non-trivial amount of the traditional Non-resident Indian net capital flows have been in the form of non-repatriable rupee RUPEE, comm. law. A denomination of money in Bengal. In the computation of ad valorem duties, it is valued at fifty-five and one half cents. Act of March 2, 1799, s. 61; 1 Story's L. U. S. 627. Vide Foreign coins.
2. accounts during the five years preceding the Resurgent India Bond issue in 1998. This suggests that Non-resident Indians, unlike foreign investors (who are unlikely to hold rupees given the limited convertibility of the Indian rupee into a foreign currency), have an economic need to utilize rupees for the reasons mentioned earlier, such as providing financial assistance to their parents, siblings and relatives living in India, buying property in India consistent with their future plans to return to India, owning businesses in India, and contributing significant amounts to charitable organizations in India. Second, by providing employment through owning businesses in India. For example, several Indian entrepreneurs from silicon valley have set up software enterprises in cities, such as Bangalore and Hyderabad. Finally, through family, relatives and affiliations with political organizations control a non-trivial proportion of electoral votes.
Appendix B. Description of Moody's Credit Ratings This appendix presents a brief description of Moody's credit ratings, and the corresponding numeric rating created by the authors. Moody's Credit Rating Numeric Rating Brief Description Investment Grade--High Creditworthiness Aaa 16 Gilt edge, prime, maximum safety Aa3-Aa1 13-15 Very high grade, high quality A3-A1 10-12 Upper medium grade Baa3-Baa1 7-9 Lower medium grade Distinctly Speculative--Low Creditworthiness Ba3-Ba1 4-6 Low grade, speculative B3-B1 1-3 Highly Speculative Predominantly Speculative--Substantial Risk or in Default Caa 0 Substantial risk, in poor standing Ca 0 May be in default, extremely speculative C 0 Even more speculative than those above Source: Wilson, R.S. and Fabozzi, F.J., 1990, The New Corporate Bond Market, Chicago, IL, Probus Publishing Company. Numeric rating is created by the authors. Appendix C. List of Matched Bonds This appendix provides the list of matched bonds based on the Near Neighbor (N=10) matching method for the Resurgent India Bonds as reported in Column 2 of Table III with the propensity score estimated based on a probit model. We report the nation of the issuer, yield spread (in basis points), numeric credit rating (based on the numeric scale in Appendix B), maturity (in years), whether exchange listed (1 if exchange listed and 0 otherwise), and whether sovereign-grade (1 if sovereign grade and 0 otherwise). The average yield savings is 201.20 basis points reported in Column 2 of Table III which equals the average yield spread of 432.20 basis points (see below) minus the 231 basis points yield spread of Resurgent India Bonds. Issuer's Maturity in Nation Yield Spread Credit Rating Years Argentina 425.00 4.00 5.00 Argentina 281.00 4.00 5.00 Argentina 253.00 4.00 8.00 Argentina 236.00 4.00 5.00 Mexico 256.00 5.00 6.00 South Korea 643.00 5.00 5.00 South Korea 563.00 5.00 4.00 South Korea 585.00 5.00 2.00 South Korea 537.00 5.00 2.00 South Korea 543.00 5.00 3.00 Average 432.20 4.60 4.50 Issuer's Exchange Nation Listed Sovereign Argentina 0.00 1.00 Argentina 0.00 0.00 Argentina 0.00 0.00 Argentina 0.00 0.00 Mexico 0.00 1.00 South Korea 0.00 0.00 South Korea 0.00 0.00 South Korea 0.00 0.00 South Korea 0.00 0.00 South Korea 0.00 0.00 Average 0.00 0.20 Appendix D. Outstanding Balances under Various Non-Resident Indian Deposit Schemes during 1996-01 This appendix presents the outstanding balances in millions of US dollars as at the end of March under various Non-Resident Indian deposit schemes during 1996-01, namely, Foreign Currency Non-Resident (FCNR) deposits, Non-Resident External (NRE) Rupee Accounts, and Non-Resident Non-Repatriable (NRNR) Rupee Deposits. The FCNR deposits are held in foreign currency and are also repaid in foreign currency. The NRE accounts are held in Indian rupees, converted at the current spot exchange rate and are fully repatriable at the future spot exchange rate (at the time of withdrawal). The NRNR accounts are held in Indian rupees, converted at the current spot exchange rate and are not repatriable in foreign currency, i.e., repayment is only in Indian rupees. Category 4/95-3/96 4196-3/97 4/97-3/98 Foreign Currency Non-Resident (FCNR) Deposits 9975 9802 8468 Non-Resident External (NRE) Rupee Accounts 3916 4983 5637 Non-Resident Non-Repatriable (NRNR) Rupee Deposits 3542 5604 6262 Total Amount 17433 20389 20367 Category 4/98-3/99 4/99-3/00 4/00-3/01 Foreign Currency Non-Resident (FCNR) Deposits 7835 8172 9076 Non-Resident External (NRE) Rupee Accounts 6045 6758 7147 Non-Resident Non-Repatriable (NRNR) Rupee Deposits 6618 6754 6849 Total Amount 20498 21684 23072 Source: Reserve Bank of India (RBI) Bulletin, Trade and Balance of Payment, 2002.
We thank the seminar participants at the American Finance Association (AFA AFA
In currencies, this is the abbreviation for the Afghanistan Afghani.
The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. ) annual meeting in Washington, D.C., the Georgia Tech/Fortis International Finance Conference in Atlanta, the Global Corporate Governance Corporate Governance
The relationship between all the stakeholders in a company. This includes the shareholders, directors, and management of a company, as defined by the corporate charter, bylaws, formal policy, and rule of law. Forum's regional workshop in Hyderabad, India, the Financial Management Association (FMA FMA Full Metal Alchemist (gaming)
FMA Federal Marriage Amendment
FMA Financial Market Authority (Austrian: Österreichische Finanzmarktaufsicht)
FMA Financial Management Association ) annual meeting in Denver, and at Vanderbilt University Vanderbilt University, at Nashville, Tenn.; coeducational; chartered 1872 as Central Univ. of Methodist Episcopal Church, founded and renamed 1873, opened 1875 through a gift from Cornelius Vanderbilt. Until 1914 it operated under the auspices of the Methodist Church. for helpful comments. We thank an anonymous referee A judicial officer who presides over civil hearings but usually does not have the authority or power to render judgment.
Referees are usually appointed by a judge in the district in which the judge presides. , the Editors (Lemma lemma (lĕm`ə): see theorem.
(logic) lemma - A result already proved, which is needed in the proof of some further result. Senbet and Alex Triantis), Geert Bekaert, Peter DeMarzo, Vikram Jaipuria (Citibank Non-resident Indian services), Roger Huang, Ken Singleton
American biochemist. He shared a 1972 Nobel Prize for pioneering studies of ribonuclease. .for helpful comments. We also thank Nilesh Jain of Lexicon Finance Limited, India for providing useful data and Alex Franta for his research assistance. A number of students provided data and related inputs that helped improve this article.
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(1) For example, Boot and Thakor (1993) show that the revenue maximizing strategy for a firm selling securities in an asymmetric information environment is to split the claims on the cash flow from the asset into an information-sensitive security that promotes informed trading and a second claim that is less sensitive to information. Allen and Gale (1988) incorporate transaction costs of issuing securities to investors facing short-sales constraints CONSTRAINTS - A language for solving constraints using value inference.
["CONSTRAINTS: A Language for Expressing Almost-Hierarchical Descriptions", G.J. Sussman et al, Artif Intell 14(1):1-39 (Aug 1980)]. . They examine the security design problem from the viewpoint of providing optimal risk-sharing among investors, and show that the issuing firm's income stream should be split so that in every state all payoffs are allocated to the security held by the group that values it most.
(2) This view is consistent with the empirical evidence on foreign equity ownership restrictions, namely, economically significant stock price premia documented for unrestricted shares (i.e., those open for investment to all investors) relative to restricted shares (i.e., those open for investment only to Mexican investors, as in the case of Domowitz, Glen, and Madhavan, 1997) of the same company. Also, see Stulz-Wasserfallen (1995) for similar evidence from Switzerland, and Bailey, Chung, and Kang (1999) for similar evidence for a larger sample of 11 countries with foreign ownership restrictions.
(3) There is a large literature on collateral. For example, Berger and Udell (1990) document that collateral plays an important role in more than two-thirds of commercial and industrial loans in the United States. Boot, Thakor, and Udell (1991) endogenize the use of outside collateral in a model with moral hazard and adverse selection. John, Lynch, and Puri (2003) study how collateral affects bond yields, and Bensanko and Thakor (1987), Chan and Kanatas (1985), and Chan and Thakor (1987) elaborate on the role of collateral in the presence of asymmetric information. Our article differs from these articles in that we consider the effect of differential valuation of collateral by different investor clienteles on security design.
(4) A non-niche clientele investor may hold a security for reasons such as portfolio diversification Diversification
A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance.
Diversification is possibly the greatest way to reduce the risk. , higher perceived credit quality etc.
(5) Specifically, we use country credit ratings of Institutional Investor Service, International Country Risk Guide, and Moody's Investor Services in our analysis. Our results are qualitatively similar (see Section II.D.1 for details). For an extensive list of articles that examine the relationship between emerging market spreads and credit ratings, see http://www.duke.edu/~charvey/research.htm, for example, Erb, Harvey, and Viskanta (1996, 2000). Also see Bekaert and Harvey (2003) for an excellent survey of emerging market finance.
(6) We see no significant increase in market segmentation for India during the sample period. See Bekaert and Harvey (1995) and Bekaert, Harvey, and Lundblad (2003) for details.
(7) See Ederington, Yawitz, and Roberts (1987) for the details of the bond rating process and Dallas (1997) for the role of bond ratings in debt markets.
(8) See Appendix B for a brief description of Moody's credit ratings. Quite frequently, rating agencies release information about the credit outlook of the issuer, especially the possibility of a potential upgrade or downgrade, in addition to the letter rating (e.g., Aaa, A3 etc.). Markets typically factor in such information in determining the price and yield of a debt issue. We construct a comprehensive credit rating measure (see Gande and Parsley (2005) for details) to capture such information as follows: if a rating agency places an issuer under review for a potential upgrade (downgrade) or if the associated outlook for an issuer is positive (negative), we increase (decrease) the credit rating by a notch notch (noch) incisure; an indentation on the edge of a bone or other organ.
aortic notch dicrotic n.
1. . For example, while Colombia's sovereign credit Sovereign credit is the credit of a sovereign country backed by the financial resources of that state. Sovereign credit is the opposite of sovereign debt. Fiat money is sovereign credit and sovereign bonds are sovereign debts. When money buys bonds, sovereign credit cancels sovereign debt. rating at the time the Resurgent India Bonds were issued (August 1998) was Baa3, Moody's had a negative outlook on Colombia for a possible downward revision since March 1998. Consequently, the comprehensive credit rating for Colombian sovereign debt is Ba1 instead of Baa3. However, our results are qualitatively unchanged when we use Moody's explicit credit rating (not reported in the article).
(9) An article in the Financial Express, a prominent Indian financial newspaper (September 2, 1998, Banking section) quotes a J. P. Morgan's report: "... the confidence expressed by expatriate Indians is encouraging and displays the fact that the cost at which funds have been raised imply a perceived sovereign rating three or four notches higher than the current levels. For comparison sake, China's 2003 yankee bond Yankee Bond
A bond denominated in U.S. dollars and issued in the United States by foreign banks and corporations.
This type of a bond is known as a foreign bond. issue rated A3 by Moody's trades at a spread of 280 basis points over the 10-year US Treasury implying a dollar yield of 7.90% and the Resurgent India Bond issue is not even sovereign risk Sovereign Risk
The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts. ."
(10) The results are qualitatively similar when we replace the numerical counterpart of the credit rating with a set of credit rating dummy variables (as in Table IV), and additionally replace MATURITY with its logarithmic logarithmic
pertaining to logarithm.
when the logs of two variables plotted against each other create a straight line. term, LN(MATURITY) to control for potential non-linearities.
(11) For illustration purposes, as suggested by a referee, we report in Appendix C the list of matched bonds for the Resurgent India Bond issue using the Near Neighbor (n=10) matching method where propensity scores are estimated through a probit model. The list of matched bonds for the India Millennium Bond issue (not reported here) is qualitatively similar.
(12) The results are qualitatively unchanged when we replace maturity with its logarithmic term, LN(MATURITY) to control for potential non-linearities in Column 1 of Table IV.
(13) The estimated yield savings from the 150 basis points yield differential based on semi-annual compounding is 4,200[[1+(7.75%+1.50%)/2].sup.10] - 4,200[[1+(7.75%/2)].sup.10] = $458 million for Resurgent India Bonds, and 5,500[[1+(8.5%+1.50%)/2].sup.10] - 5,500[1+(8.5%/2)].sup.10] = $620 million for India Millennium Bonds. Together, this represents a saving of $1.08 billion.
(14) The relationship between emerging market spreads and credit ratings (such as the ICRG and II ratings) is well-established--see http://www.duke.edu/~charvey/research.htm. We thank Cam Harvey for providing us the Institutional Investor country credit ratings data. The source for the International Country Risk Guide (ICRG) composite credit ratings is the Political Risk Services Group (http://www.prsgroup.com/icrg/icrg.html).
(15) On June 19, 1998 Moody's lowered India's sovereign credit rating to Ba2 and State Bank of India's long-term foreign currency rating to Ba3 on concern over escalating tensions with its neighbor, Pakistan. The previous rating activity was on January 9, 1998 when Moody's placed India's sovereign credit rating and State Bank of India's long-term foreign currency rating of Baa3 under review for a possible downgrade. Hence, as described in footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." 8, the explicit credit rating is Baa3 and the comprehensive credit rating is Bal prior to June 19, 1998.
(16) In fact, Boot, Milbourn, Schmeits (2005) argue that credit rating agencies Credit Rating Agencies
Firms that compile information on and issue public credit ratings for a large number of companies. provide credible monitoring services through the credit watch procedures. That is, the credit watch procedure allows for an implicit contract between the firm and the credit rating agency A credit rating agency (CRA) is a company that assigns credit ratings for issuers of certain types of debt obligations. In most cases, these issuers are companies, cities, non-profit organizations, or national governments issuing debt-like securities that can be traded on a where the former implicitly promises to undertake specific actions ("recovery effort") to mitigate mit·i·gate
To moderate in force or intensity.
miti·gation n. the possible deterioration de·te·ri·o·ra·tion
The process or condition of becoming worse. of its credit standing.
(17) We thank a referee for drawing our attention to the inflation issue and its link to market segmentation.
(18) Mayers and Smith (1987) document an instance of certain US government securities, known as flower bonds that trade at a substantial premium (i.e., lower yield) than comparable non-flower bonds. These flower bonds, issued prior to 1966, could be redeemed re·deem
tr.v. re·deemed, re·deem·ing, re·deems
1. To recover ownership of by paying a specified sum.
2. To pay off (a promissory note, for example).
3. at par plus accrued interest Accrued Interest
The interest that has accumulated on a bond since the last interest payment up to but not including the settlement date.
There are two methods for calculating accrued interest:
1) 360-day year method, used for corporate and municipal bonds. for the purpose of paying estate taxes, if held at the time of death. Such a flower bond Flower Bond
Fixed income products that were originally purchased by investors at a discount for the purpose of paying federal estate taxes upon their maturity.
Investors would purchase these bonds before their death in anticipation of federal estate taxes. , which may be viewed as a straight bond plus an insurance policy, will consequently trade at a lower yield reflecting the embedded Inserted into. See embedded system. insurance policy.
(19) Since domestic residents are not allowed to hold foreign exchange as per the exchange control regulations of the Reserve Bank of India, a domestic resident who receives the Resurgent India Bonds or the India Millennium Bonds as a gift gets an equivalent amount in Indian Rupees converted at the prevailing spot exchange rate.
(20) Such behavior of passing on a part of the commission to investors as an investment incentive is not unique to these bonds. Rather, it is a fairly common practice in some other markets, such as the firm-commitment underwritten debt issues in the euro markets.
(21) The commission kickback of 1.5% is equivalent to a Non-resident Indian paying 98.5% of par value for the bond instead of 100% of par value. The annualized annualized
Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. yield that equates 7.75% coupon paid semi-annually in exchange for 98.5% of the par value is 8.12%. In other words, y = 8.12% in the following equation:
98.5 = 3.875/(1+y/2) + 3.875/[(1+y/2).sup.2] + ... + 3.875/[(1+y/2).sup.9] + 103.875/[(1+y/2).sup.10].
(22) In an analogous analogous /anal·o·gous/ (ah-nal´ah-gus) resembling or similar in some respects, as in function or appearance, but not in origin or development.
adj. fashion, an investor clientele may have a higher perceived credit rating (i.e., lower probability of default). See Section II.D.1 for details.
(23) In the US, Continental Illinois (deposits of $29 billion and assets of $40 billion, as reported in the Federal Reserve Bank of Chicago's website), which has a slightly smaller asset base than State Bank of India, and certainly much smaller relative to the US economy than State Bank of India is to the Indian economy, was bailed out in 1984 as it was considered "too big to fail." When placed in this context, State Bank of India, the largest bank in India, and of greater relative importance to its national economy, is likely to be considered "too big to fail" by the Government of India.
(24) The Economist Intelligence Unit, which is part of the Economist business group (that includes the well-known Economist magazine), is a leading provider of country, industry and management analysis for the past 60 years. Their extensive international reach and unfettered independence makes them one of the most trusted and valuable resource for international companies, financial institutions, universities and government agencies. See http://db.eiu.com for additional details.
(25) Using Footnote 13, the present value of interest savings from Resurgent India Bonds is: 458/[(1+(7.75%/2).sup.10]=$313.16 million. Similarly, the present value of interest savings from India Millennium Bonds is: 620/[(1+8.5%/2).sup.10]=$408.91, which totals to $722.07 million.
(26) Our conclusion holds even if we use a lower yield savings to account for alternative explanations in Section II.D. For example, the present value of yield savings (estimated from footnotes 13 and 25 using 100 basis points) is significantly higher than the $127.07 million corresponding to Column 1 of Table VII.
Amar Gande and Manju Puri *
* Amar Gande is an Assistant Professor of Finance at Vanderbilt University in Nashville TN. Manju Puri is an Associate Professor of Finance at Duke University and NBER NBER National Bureau of Economic Research (Cambridge, MA)
NBER Nittany and Bald Eagle Railroad Company , in Durham, NC.
Table I. Salient features of Resurgent India Bonds (RIBs) and India Millennium Bonds (IMBs) This table presents the salient features of Resurgent India Bonds (RIBs) and India Millennium Bonds (IMBs). Issue Opened On August 5, 1998 (RIBs); October 21, 2000 (IMBs) Maturity Five years from the date of issue Coupon rate 7.75% ($), 8.00% ([pounds sterling]), 6.25% (DM) on an annualized basis for RIBs and 8.50% ($), 7.85% ([pounds sterling]) and 6.85% (Euro). Investors can receive interest either half-yearly or on a cumulative basis at maturity. Repatriability The principal amount as well as the interest earned on Resurgent India Bonds and India Millennium Bonds is fully repatriable in the currency of denomination for all Non-resident holders. Premature encashment is permitted without any penalty after six months from the date of issue on a non- repatriable basis in Indian Rupees. Loans against Bonds The Resurgent India Bonds and India Millennium Bonds can be presented as collateral for bank loans up to 90% of the invested amount, either in Indian Rupees or in foreign currency. The interest rate on such loans is at the discretion of individual banks. However, loans in foreign currency require approval of the Reserve Bank of India. Holding/Transferability The Resurgent India Bonds and India Millennium Bonds can be held jointly by Non-Resident Indians with resident Indians on a "Former or Survivor Basis." The Resurgent India Bonds and India Millennium Bonds are freely transferable between Non-resident Indians and/or Overseas Corporate Bodies (owned directly or indirectly to the extent of at least 60% by Non-resident Indians). Tax Benefits The interest earned on Resurgent India Bonds and India Millennium Bonds is not subject to any withholding tax or income-tax in India. The Resurgent India Bonds and India Millennium Bonds are free from wealth-tax liability in India and would not attract any gift-tax in India either in the hands of the donors or the donees. All of these tax benefits will continue to apply in the hands of the transferees at least in the case of the first transfer. Issue Closed On August 24, 1998 (RIBs); November 20, 2000 (IMBs). Source: Dow Jones Newswires. Table II. Average Yield Spread of Comparable Issues This table presents the average yield spread (in basis points) of comparable fixed-rate US dollar denominated issues from emerging markets. Yield spread is measured as the ex ante yield of a debt security minus the ex ante yield of a US Treasury security of comparable maturity. Panel A presents the average yield spread in basis points classified by the credit rating. Panel B presents the average yield spread, average credit rating (based on the numeric scale in Appendix B), average maturity (in years), fraction of issues that are exchange listed, and fraction of issues that are sovereign-grade (these variables are used in regressions in subsequent tables) classified by country. Panel A. By Credit Rating Credit Rating # Issues Yield Spread B3 2 771 B2 5 618 B1 52 458 Ba3 21 440 Ba2 46 490 Ba1 29 547 Baa3 46 333 Baa2 28 231 Baa1 10 384 A3 26 198 A2 3 171 Aa3 1 199 Total 269 400 Panel B. By Nation Average Average Yield Credit Nation # Issues Spread Rating Argentina 22 391 3.55 Brazil 24 456 3.00 Chile 3 350 9.00 China 17 234 10.00 Colombia 13 613 5.77 El Salvador 1 314 7.00 Hungary 12 137 9.17 India 4 324 5.00 Indonesia 2 771 1.00 Israel 5 134 10.60 Lebanon 10 337 3.00 Malaysia 3 250 8.67 Mexico 40 373 6.10 Panama 4 418 9.00 Philippines 17 633 6.00 Poland 2 378 8.00 South Africa 4 346 7.00 South Korea 49 377 6.57 Taiwan 1 199 13.00 Thailand 4 379 6.75 Turkey 12 580 3.75 Uruguay 10 260 7.00 Venezuela 10 629 2.50 Total 269 400 5.94 Average Fraction Maturity in Exchange Fraction Nation Years Listed Sovereign Argentina 4.91 0.36 0.41 Brazil 5.75 0.71 0.29 Chile 7.33 0.67 0.33 China 6.94 0.35 0.88 Colombia 10.54 0.15 1.00 El Salvador 6.00 1.00 1.00 Hungary 5.58 0.50 0.17 India 6.75 1.00 0.00 Indonesia 7.00 0.00 1.00 Israel 5.00 0.40 1.00 Lebanon 4.80 1.00 1.00 Malaysia 5.00 0.33 0.67 Mexico 6.80 0.50 0.38 Panama 16.50 0.00 1.00 Philippines 10.24 0.18 0.41 Poland 5.50 0.50 0.50 South Africa 11.50 0.00 1.00 South Korea 4.47 0.27 0.08 Taiwan 9.00 0.00 0.00 Thailand 7.00 0.50 0.75 Turkey 7.92 0.58 0.92 Uruguay 11.00 0.50 0.90 Venezuela 11.40 0.20 0.40 Total 6.95 0.42 0.48 Table III. Near Neighbor, Gaussian, and Epanechnikov Estimates of Yield Difference between Non-Resident Indian Bonds and Matched Bonds This table presents the estimated yield difference between Non-resident Indian bonds and matched bonds using the NEAR NEIGHBOR, GAUSSIAN, and EPANECHNIKOV estimators developed in Heckman, Ichimura, and Todd (1997, 1998). To implement these estimators, we estimate propensity scores for the restricted bonds, namely the Non-resident Indian bonds, such as the Resurgent India Bonds, and India Millennium Bonds, and for the non-restricted bonds through a logit model (top panel) and a probit model (bottom panel): RESTRICTED = [[beta].sub.0] + [[beta].sub.cr] CREDIT RATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + error. where RESTRICTED takes a value of one for Non-resident Indian bonds (and zero otherwise). CREDIT RATING is the Moody's credit rating of a bond. Each rating is given a numerical counterpart as shown in Appendix 2, e.g., Aaa = 16, Aa1 = 15, Aa2 = 14. MATURITY is the maturity of the bonds in years. EXCHANGE takes a value of one if the bond is listed on an exchange, and zero otherwise. SOVEREIGN stands for whether the debt issue is a sovereign bond. The estimators are defined as follows: NEAR NEIGHBOR chooses for each restricted bond, the n non-restricted bonds with closest propensity scores. We specify n=10 AND n=25. GAUSSIAN and EPANECHNIKOV use a weighted average of non-restricted bonds, with more weight given to a non-restricted bond with propensity score that is closer to a restricted bond's propensity score. GAUSSIAN uses all non-restricted bonds, while for EPANECHNIKOV, we specify a propensity score bandwidth (h=0.01) that limits the sample of non-restricted bonds. For each estimator, we have a sample of matched pairs as described above, for which we compute the difference between the yields of restricted and matched bonds, and report the average yield difference in basis points. Column 1 reports the results for all restricted bonds and the other two columns report the results for Resurgent India Bonds and India Millennium Bonds separately. The standard error and the t-statistics are estimated using bootstrapping. (1) (2) All Restricted Resurgent India Bonds Bonds Yield Diff. Yield Diff. Estimator (bps) T ratio (bps) T ratio Logit Model NEAR NEIGHBOR (n=10) -223.15 -2.80 (a) -183.00 -2.22 (b) NEAR NEIGHBOR (n=25) -202.56 -5.15 (a) -115.40 -2.06 (c) GAUSSIAN -145.27 -5.28 (a) -138.83 -2.94 (a) EPANECHNIKOV -199.24 -2.12 (b) -172.30 -1.19 Probit Model NEAR NEIGHBOR (n=10) -173.45 -2.20 (b) -201.20 -2.56 (b) NEAR NEIGHBOR (n=25) -204.44 -5.37 (a) -127.32 -2.29 (b) GAUSSIAN -145.32 -5.31 (a) -139.10 -2.89 (a) EPANECHNIKOV -217.91 -2.13 (b) -174.70 -1.59 (3) India Millennium Bonds Yield Diff. Estimator (bps) T ratio Logit Model NEAR NEIGHBOR (n=10) -297.75 -3.74 (a) NEAR NEIGHBOR (n=25) -210.48 -3.05 (a) GAUSSIAN -145.33 -2.88 (a) EPANECHNIKOV -310.89 -1.76 (c) Probit Model NEAR NEIGHBOR (n=10) -325.55 -3.74 (a) NEAR NEIGHBOR (n=25) -213.90 -3.21 (a) GAUSSIAN -145.54 -2.58 (a) EPANECHNIKOV -334.13 -1.61 (a), (b), and (c) stand for significance at the 1%, 5%, and 10% levels using a two-tailed test. Table IV. Multivariate Regressions of Yield Spread This table gives the OLS estimates of the following equation: YIELD SPREAD = [[beta].sub.0] + [[beta].sub.cr] CREDIT RATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + [[beta].sub.4] RESTRICTED + error. The dependent variable YIELD SPREAD is the ex ante yield spread (in basis points) of a new debt issue, i.e., ex ante offering yield of new debt security minus the ex ante yield of a U.S. Treasury security of comparable maturity. The independent variables are: CREDIT RATING is a set of comprehensive credit rating dummy variables. For example, Ba1 is a dummy variable which is one if Moody's comprehensive credit rating for the issue is Bal. MATURITY is the maturity of a debt issue measured in years. EXCHANGE takes the value one if a debt issue is traded on an exchange. SOVEREIGN stands for whether the debt issue is a sovereign bond. RESTRICTED takes a value of one for Non-resident Indian bonds, such as the Resurgent India Bonds, and the India Millennium Bonds. All dummy variables are zero otherwise. Column 1 reports the results for all restricted bonds and the other two columns report the results for Resurgent India Bonds and India Millennium Bonds separately. The T ratios are adjusted for heteroskedasticity using White's (1980) variance-covariance matrix. (1) (2) All Restricted bonds Resurgent India Bonds Variable Coeff T ratio Coeff T ratio INTERCEPT 72.24 3.55 (a) 118.37 3.52 (a) B3 609.39 14.24 (a) 684.62 31.01 (a) B2 396.71 5.02 (a) B1 286.32 6.92 (a) 323.31 7.17 (a) Ba3 265.84 6.08 (a) 153.96 5.36 (a) Ba2 312.35 9.62 (a) 261.01 7.70 (a) Ba1 354.31 7.39 (a) 261.09 6.30 (a) Baa3 137.30 3.55 (a) 89.45 2.13 (b) Baa2 85.96 3.10 (a) -16.69 -0.26 Baa1 149.53 2.61 (a) 176.70 7.52 (a) A3 33.95 0.46 (a) A2 26.95 0.68 (a) MATURITY 14.08 6.23 (a) 9.96 4.18 (a) EXCHANGE 32.32 1.29 4.03 0.14 SOVEREIGN -9.72 -0.30 -63.67 -2.21 (b) RESTRICTED -170.90 -5.52 (a) -112.82 -4.25 (a) Observations 273 117 Adjusted [R.sup.2] 0.3468 0.4676 (3) India Millenium Bonds Variable Coeff T ratio INTERCEPT 61.71 2.18 (b) B3 589.71 11.01 (a) B2 397.83 4.88 (a) B1 288.05 4.67 (a) Ba3 437.98 7.15 (a) Ba2 501.28 5.94 (a) Ba1 482.99 5.52 (a) Baa3 175.09 3.54 (a) Baa2 119.09 3.69 (a) Baa1 151.90 2.21 (b) A3 89.54 0.80 A2 39.99 0.68 MATURITY 15.25 4.85 (a) EXCHANGE 40.94 1.14 SOVEREIGN -20.95 -0.43 RESTRICTED -316.14 -6.52 (a) Observations 156 Adjusted [R.sup.2] 0.4175 (a), (b), and (c) stand for significance at the 1%, 5%, and 10% levels using a two-tailed test. Table V. Multivariate Regressions of Yield Spread (using Alternative Measures of Credit Rating) This table gives the OLS estimates of the following equation: YIELD SPREAD = [[beta].sub.0] + [[beta].sub.cr] CREDITRATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + [[beta].sub.4] RESTRICTED + error. The dependent variable YIELD SPREAD is the ex ante yield spread (in basis points) of a new debt issue, i.e., ex ante offering yield of new debt security minus the ex ante yield of a US Treasury security of comparable maturity. The independent variables are: CREDIT RATING stands for the International Country Risk Guide (ICRG) composite credit rating in Panel A, and the Institutional Investor (II) country credit rating in Panel B for the bond issuer. MATURITY is the maturity of a debt issue measured in years. EXCHANGE takes the value one if a debt issue is traded on an exchange. SOVEREIGN stands for whether the debt issue is a sovereign bond. RESTRICTED takes a value of one for Non-resident Indian bonds, such as the Resurgent India Bonds, and the India Millennium Bonds. All dummy variables are zero otherwise. The T ratios are adjusted for heteroskedasticity using White's (1980) variance-covariance matrix. Panel A. ICRG Composite Credit Rating Variable Coeff T ratio INTERCEPT 1435.54 9.64 (a) CREDIT RATING -15.91 -8.00 (a) MATURITY 15.25 5.91 (a) EXCHANGE 5.73 0.23 SOVEREIGN -89.95 -3.40 (a) RESTRICTED -204.19 -5.87 (a) Observations 273 Adjusted [R.sup.2] 0.2975 Panel B. Institutional Investor Rating INTERCEPT 592.26 8.10 (a) CREDIT RATING -5.24 -4.29 (a) MATURITY 14.83 5.51 (a) EXCHANGE 10.46 0.39 SOVEREIGN -62.28 -2.23 (b) RESTRICTED -122.37 -3.94 (a) Observations 273 Adjusted [R.sup.2] 0.1813 (a), (b), and (c) stand for significance at the 1%, 5%, and 10% levels using a two-tailed test. Table VI. Multivariate Regressions of Yield Spread Controlling for Inflation or Country Fixed Effects This table gives the OLS estimates of the following equation: YIELD SPREAD = [[beta].sub.0] + [[beta].sub.cr] CREDITRATING + [[beta].sub.1] MATURITY + [[beta].sub.2] EXCHANGE + [[beta].sub.3] SOVEREIGN + [[beta].sub.4] RESTRICTED + [[beta].sub.ctrl] CTRL + error. The dependent variable YIELD SPREAD is the ex ante yield spread (in basis points) of a new debt issue, i.e., ex ante offering yield of new debt security minus the ex ante yield of a US Treasury security of comparable maturity. The independent variables are: CREDIT RATING is a set of comprehensive credit rating dummy variables. For example, Ba1 is a dummy variable which is one if Moody's comprehensive credit rating for the issue is Ba1. MATURITY is the maturity of a debt issue measured in years. EXCHANGE takes the value one if a debt issue is traded on an exchange. SOVEREIGN stands for whether the debt issue is a sovereign bond. RESTRICTED takes a value of one for Non-resident Indian bonds, such as the Resurgent India Bonds, and the India Millennium Bonds. CTRL stands for INFLATION in Column 1 (where we control for inflation) and for COUNTRY in Column 2 (where we control for country fixed effects), where INFLATION is the lagged annual inflation rate at the time of the restricted bond issue obtained from the World Economic Indicators database and COUNTRY represents the set of country indicator variables reflecting the country fixed effects included in the regression. All dummy variables are zero otherwise. The T ratios are adjusted for heteroskedasticity using White's (1980) variance-covariance matrix. (1) (2) Inflation Country Fixed Effects Variable Coeff T ratio Coeff T ratio INTERCEPT 74.59 3.65 (a) 78.75 3.92 (a) B3 596.95 12.49 (a) 627.01 12.01 (a) B2 371.23 4.54 (a) 303.58 2.30 (b) B1 273.53 6.40 (a) 298.26 3.99 (a) Ba3 236.04 5.81 (a) 196.13 5.06 (a) Ba2 299.36 8.86 (a) 296.68 8.26 (a) Ba1 349.28 7.25 (a) 267.01 5.07 (a) Baa3 125.18 3.20 (a) 179.22 2.88 (a) Baa2 81.09 2.83 (a) 115.78 3.94 (a) Baa1 149.87 2.65 (a) 214.08 1.17 A3 32.30 0.44 189.02 4.42 (a) A2 24.22 0.61 290.63 6.37 (a) MATURITY 13.80 6.07 (a) 13.36 5.98 (a) EXCHANGE 30.78 1.23 53.64 1.95 (c) SOVEREIGN -13.55 -0.42 -28.79 -0.67 RESTRICTED -155.55 -5.01 (a) -121.57 -3.50 (a) INFLATION 1.18 1.72 (c) Country Fixed Effects Yes Observations 273 273 Adjusted [R.sup.2] 0.3494 0.3951 (a), (b), and (c) stand for significance at the 1%, 5%, and 10% levels using a two-tailed test. Table VII. Average Abnormal Return Around the Announcement of Non-Resident Indian Bonds This table presents the average abnormal return on foreign currency bonds of Indian issuers surrounding the announcement of Resurgent India Bonds (announced on June 2, 1998), and India Millennium Bonds (announced on September 21, 2000). Abnormal returns are based on the market adjustment method, where the market index is the J.P. Morgan Emerging Markets Index (JPMEMBI). The results are based on a 100 day estimation time period, from day -102 to -3 relative to the announcement date. Column 1 reports the results for all restricted bonds and the other two columns report the results for Resurgent India Bonds and India Millennium Bonds separately. The T ratios are computed using the methodology of Brown and Warner (1985) that considers both time series and cross-sectional dependence in returns. (1) (2) All Restricted Bonds Resurgent India Bonds Abnormal Abnormal Date Return (%) T ratio Return (%) T ratio -2 0.00 0.08 0.11 0.15 -1 0.64 1.25 0.64 0.93 0 -1.40 -2.74 (a) -1.59 -2.32 1 0.13 0.25 0.05 0.07 2 -0.29 -0.57 -0.10 -0.15 (3) India Millennium Bonds Abnormal Date Return (%) T ratio -2 -0.24 -0.47 -1 0.64 1.30 0 -0.99 -1.98 (b) 1 0.32 0.64 2 -0.73 -1.46 (a), (b), and (c) stand for significance at the 1%, 5%, and 10% levels using a two-tailed test. Table VIII. Multivariate Regressions of Announcement Effects Associated with New Bond Issues This table gives the OLS estimates of the following equation: ABNORMAL RETURN = [[beta].sub.0] + [[beta].sub.nbi] NEW BOND ISSUE + [[beta].sub.1] LN(NEW BOND SIZE) + [beta]LN(BOND SIZE) [[beta].sub.3] RESTRICTED + error. The dependent variable ABNORMAL RETURN is the day 0 abnormal return of an unrestricted bond in response to the announcement of a new bond issue, measured as a percentage of the bond price on the previous day. The independent variables are: NEW BOND ISSUE is a set of new bond issue fixed effects (i.e., indicator variables). LN(NEW BOND SIZE) is the natural log of the offering size of a new bond issue, measured in $ millions. LN(BOND SIZE) is the natural log of the size of the unrestricted bond (in $ millions) whose abnormal return is being measured. RESTRICTED takes a value of one if a new bond issue is a restricted bond, such as the Resurgent India Bonds or the India Millennium Bonds, and zero otherwise. The coefficient estimates and T ratios for the new bond issue fixed effects are not reported although they are included in the regressions. The T ratios are adjusted for heteroskedasticity using White's (1980) variance-covariance matrix. Variable Coeff T ratio INTERCEPT -2.16 -2.27 (b) LN(NEW BOND SIZE) 0.41 2.63 (a) LN(BOND SIZE) -0.01 -0.07 RESTRICTED -2.85 -4.60 (a) New bond issue fixed effects Yes Observations 275 Adjusted [R.sup.2] 0.4339