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  3. 2021
  4. Preliminary Program
  5. Firm Financing in Global Markets
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Firm Financing in Global Markets

Paper Session

Monday, Jan. 4, 2021 10:00 AM - 12:00 PM (EST)

Hosted By: Society for the Study of Emerging Markets
  • Chair: Jose Tessada, Catholic University of Chile and Abdul Latif Jameel Poverty Action Lab

Redrawing the Map of Global Capital Flows: The Role of Cross-Border Financing and Tax Havens

Antonio Coppola
,
Harvard University
Matteo Maggiori
,
Stanford University
Brent Neiman
,
University of Chicago
Jesse Schreger
,
Columbia University

Abstract

Global firms finance themselves through foreign subsidiaries, often shell companies in tax havens, which obscures their nationality in aggregate statistics. We associate the universe of traded securities with their issuer’s ultimate parent and restate bilateral investment positions to better reflect the true financial linkages connecting countries around the world. We find that portfolio investment from developed countries to firms in large emerging markets is dramatically larger than previously thought. The national accounts of the United States, for example, understate the U.S. position in Chinese firms by nearly 600 billion dollars, while China’ social net creditor position to the rest of the world is overstated by about 50 percent. We additionally show how taking account of onshore issuance is important for our understanding of the currency composition of external portfolio liabilities, the nature of foreign direct investment, and the growth of financial globalization.

Benchmarking Intensity

Anna Pavlova
,
London Business School
Taisiya Sikorskaya
,
London Business School

Abstract

A fund manager evaluated relative to a benchmark index optimally invests a fraction of the fund’s assets under management (AUM) in her benchmark, and such demand is inelastic. Using a dataset of 33 U.S. equity indices, we construct a stock-level measure of benchmarking intensity (BMI), which captures the inelastic component of fund managers’ demand. The BMI of a stock is computed as the cumulative weight of the stock in all benchmarks, weighted by AUM following each benchmark. Exploiting a variation in the BMIs of stocks that transition between the Russell 1000 and Russell 2000 indices, we confirm the prediction of our theory that stocks with higher BMIs have lower long-run returns. Furthermore, using fund holdings around the index cutoff, we find evidence of inelastic demand of active managers for stocks in their benchmarks. The change in BMI resulting from an index reconstitution is positively related to the size of the index effect and allows us to compute the price elasticity of demand more accurately than in the literature. Finally, we show how considerations of optimized sampling and the growth of the CRSP indices may affect identification in studies that exploit the Russell cutoff.

Benchmarks, Firm Financing, and Real Effects: Evidence from a Global Natural Experiment

Fernando Broner
,
Pompeu Fabra University
Juan J. Cortina
,
World Bank
Sergio L. Schmukler
,
World Bank
Tomas Williams
,
George Washington University

Abstract

We empirically study how changes in benchmark indexes affect firms’ cost of capital, external financing, and investments. For identification, we exploit one of the largest rebalancing in a global equity benchmark index by MSCI, affecting 2,508 firms in 49 countries. We show that an increase in a firm’s relative importance in the index leads to an increase in its stock price following the announcement of the rebalancing. This reduction in the cost of capital leads to an increase in the firm’s probability of issuing equity and borrowing bank debt. Firms that experience a higher increase in their importance in the index have higher capital expenditures in the years following the rebalancing. Our findings provide systematic evidence on the importance of benchmark indexes for firms’ financing and investment policies.

Ownership Concentration and Firm Value: New Evidence from Owner Stakes in IPOs

Borja Larrain
,
Catholic University of Chile
Peter Roosenboom
,
Rotterdam School of Management
Giorgo Sertsios
,
University of the Andes
Francisco Urzúa
,
City University of London

Abstract

We revisit the relationship between ownership concentration and firm value using hand-collected data on the stakes of owner-managers immediately before and after IPOs. We instrument for the reduction in concentration using market returns on the three months prior to the IPO. Short-run market returns are plausible instruments since owners engage in naïve market timing by selling more when prior returns are high, but high prior returns are unlikely to affect long-run firm value. As predicted by agency theory, a larger reduction in ownership concentration at the IPO is negatively related to valuation.
Discussant(s)
Diego Perez
,
New York University
Harrison Hong
,
Columbia University
Daniel Wolfenzon
,
Columbia University
Federico Huneeus
,
Yale University and Central Bank of Chile
JEL Classifications
  • F3 - International Finance
  • D8 - Information, Knowledge, and Uncertainty