Money, Credit, and Corporate Finance in Emerging Economies
Saturday, Jan. 5, 2019 2:30 PM - 4:30 PM
- Chair: Josef C. Brada, Arizona State University
Who Gains from Credit Granted between Firms? Evidence from Inter-Corporate Loan Announcements Made in China
AbstractWho gains from inter-corporate credit? To answer this question, we measure the impact of the announcements of inter-corporate loans in China on the stock prices of the firms involved. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas it is positive for the receivers. Firms issuing inter-group loans may be perceived by investors to have run out of worthwhile projects to finance, although the loans may bring benefits to these firms through the high interest revenues involved. Firms receiving these inter-group loans are being certified as creditworthy borrowers, although the cost on these loans may be high. Issuance of intra-group loans on the other hand may signal the propping up of financially distressed subsidiaries and their resultant expropriation in the future and the firms granting and receiving such loans will be assessed accordingly. Subsequent investment and firm performance confirms these immediate valuations as overall accurate.
Cash and the Economy: Evidence from India's Demonetization
AbstractWe analyze a unique episode in the history of monetary economics, the 2016 Indian ``demonetization.'' This policy made 86% of cash in circulation illegal tender overnight, with new notes gradually introduced over the next several months. We present a model of demonetization where agents hold cash both to satisfy a cash-in-advance constraint and for tax evasion purposes. We test the predictions of the model in the cross-section of Indian districts using several novel data sets including: a data set containing the geographic distribution of demonetized and new notes for causal inference; nightlights data and employment surveys to measure economic activity including in the informal sector; debit/credit cards and e-wallet transactions data; and banking data on deposit and credit growth. Districts experiencing more severe demonetization had relative reductions in economic activity, faster adoption of alternative payment technologies, and lower bank credit growth. The cross-sectional responses cumulate to a contraction in employment and nightlights-based output due to demonetization of 2 p.p. and of bank credit of 2 p.p. in 2016Q4 relative to their counterfactual paths, effects which dissipate over the next few months. We use our model to show these cumulated effects are a lower bound for the aggregate effects of demonetization. We conclude that unlike in the cashless limit of new-Keynesian models, in modern India cash serves an essential role in facilitating economic activity.
The Search for Yield and the Size Premium in Emerging Market Corporate Debt
AbstractEmerging market corporations have significantly increased their borrowing in international markets after the global financial crisis. We show that this expansion was led by large-denomination bond issuances (bonds with face values exceeding US$300 million, and often exceeding US$500 million). The drastic shift in the pattern of bond issuances reflects increased investor willingness to purchase emerging market corporate bonds so long as they are included in international bond indexes, which require face values of at least US$300 and US$500 million. Inclusion in the index gives investors the advantage of holding more liquid bonds, which also makes them more similar to those issued by U.S. corporates and emerging market sovereigns. Additionally, those bonds allow investors to target performance closer to the market benchmark. After 2008, emerging market firms started facing a new tradeoff. They could borrow at a lower cost (a full percentage point lower) by issuing index-eligible bonds, which often imply raising more financing than needed. Or, they could borrow smaller quantities at a higher cost, while avoiding accumulating substantial cash assets. Because the liquidity premium for large-denomination bonds is sizable, many companies have issued them. As a result, larger firms have become more likely to issue them and some smaller firms have issued large bonds for the first time, which has entailed large increases in their post-issuance cash holdings. The overall changes after 2008 in emerging market corporate issuance are not apparent in advanced economies.
- F3 - International Finance
- E4 - Money and Interest Rates