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Multilateral debt relief through the eyes of financial markets

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  • Raddatz, Claudio

Abstract

The economic benefits of debt relief for recipient countries have been the subject of arduous debate, at least partly motivated by the difficulty of identifying the causal effect of debt relief on economic performance-given that performance itself may drive the decision to grant relief. This paper conducts an event study to assess the economic consequences of multilateral debt relief for recipient countries that is robust to these reverse causality issues. It estimates the response of the stock prices of South African multinationals with subsidiaries in those countries to the announcement of debt relief initiatives, and shows that stock prices exhibit a significant increase above those of other firms, especially around the launching of the recent Multilateral Debt Relief Initiative. The improvement in financial markets'assessment of the value of these multinationals is consistent with lower expected levels of future taxation in the recipient countries. Overall, the results are consistent with the"debt overhang"argument for debt relief.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4872.

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Date of creation: 01 Mar 2009
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Handle: RePEc:wbk:wbrwps:4872

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Keywords: Debt Markets; External Debt; Banks&Banking Reform; Bankruptcy and Resolution of Financial Distress;

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  1. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, American Economic Association, vol. 95(2), pages 393-397, May.
  2. Serkan Arslanalp & Peter Blair Henry, 2006. "Debt Relief," NBER Working Papers 12187, National Bureau of Economic Research, Inc.
  3. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
  4. Carolin Geginat & Aart Kraay, 2012. "Does IDA Engage in Defensive Lending?," Review of Economics and Institutions, Università di Perugia, Università di Perugia, vol. 3(2).
  5. Simeon Djankov & Caralee McLiesh & Andrei Shleifer, 2005. "Private Credit in 129 Countries," NBER Working Papers 11078, National Bureau of Economic Research, Inc.
  6. Imbs, Jean & Ranciere, Romain, 2005. "The overhang hangover," Policy Research Working Paper Series, The World Bank 3673, The World Bank.
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  8. Eduardo Engel & Ronald Fischer, 2008. "Optimal Resource Extraction Contracts under Threat of Expropriation," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1636, Cowles Foundation for Research in Economics, Yale University.
  9. Corrado, Charles J. & Zivney, Terry L., 1992. "The Specification and Power of the Sign Test in Event Study Hypothesis Tests Using Daily Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 27(03), pages 465-478, September.
  10. Nicolas Depetris Chauvin & Aart Kraay, 2005. "What Has 100 Billion Dollars Worth of Debt Relief Done for Low- Income Countries?," International Finance, EconWPA 0510001, EconWPA.
  11. Deshpande, Ashwini, 1997. "The debt overhang and the disincentive to invest," Journal of Development Economics, Elsevier, Elsevier, vol. 52(1), pages 169-187, February.
  12. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, Elsevier, vol. 29(3), pages 253-268, November.
  13. Maynes, Elizabeth & Rumsey, John, 1993. "Conducting event studies with thinly traded stocks," Journal of Banking & Finance, Elsevier, Elsevier, vol. 17(1), pages 145-157, February.
  14. Corrado, Charles J., 1989. "A nonparametric test for abnormal security-price performance in event studies," Journal of Financial Economics, Elsevier, Elsevier, vol. 23(2), pages 385-395, August.
  15. Christina Daseking & Robert Powell, 1999. "From toronto Terms to the HIPC Initiative," IMF Working Papers, International Monetary Fund 99/142, International Monetary Fund.
  16. Guidolin, Massimo & La Ferrara, Eliana, 2004. "Diamonds are Forever, Wars are Not: Is Conflict Bad for Private Firms?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4668, C.E.P.R. Discussion Papers.
  17. Tito Cordella & Luca Antonio Ricci & Marta Ruiz-Arranz, 2005. "Debt Overhang or Debt Irrelevance? Revisiting the Debt Growth Link," IMF Working Papers, International Monetary Fund 05/223, International Monetary Fund.
  18. Serkan Arslanalp & Peter Blair Henry, 2006. "Policy Watch: Debt Relief," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 20(1), pages 207-220, Winter.
  19. Bulow, Jeremy & Rogoff, Kenneth S., 2005. "Grants versus Loans for Development Banks," Scholarly Articles 11129181, Harvard University Department of Economics.
  20. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth," IMF Working Papers, International Monetary Fund 05/127, International Monetary Fund.
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Cited by:
  1. Cordella, Tito & Missale, Alessandro, 2013. "To give or to forgive? Aid versus debt relief," Journal of International Money and Finance, Elsevier, Elsevier, vol. 37(C), pages 504-528.
  2. repec:udt:wpbsdt:2012-03 is not listed on IDEAS

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