Is Debt Relief Efficient?
Article first published online: 2 MAR 2005
The Journal of Finance
Volume 60, Issue 2, pages 1017–1051, April 2005
How to Cite
ARSLANALP, S. and HENRY, P. B. (2005), Is Debt Relief Efficient?. The Journal of Finance, 60: 1017–1051. doi: 10.1111/j.1540-6261.2005.00754.x
- Issue published online: 2 MAR 2005
- Article first published online: 2 MAR 2005
When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms—a $42 billion increase in shareholder value. There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment, and growth. Since the market capitalization of U.S. commercial banks with developing country loan exposure also rises—by $13 billion—the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.