Working Paper: NBER ID: w15207
Authors: Hui Tong; Shangjin Wei
Abstract: International capital flows, while potentially beneficial, are said to increase a country's vulnerability to crisis - especially if they are skewed to non-FDI types. This paper studies whether the volume and composition of capital flows affect the degree of credit crunch faced by a country's manufacturing firms during the 2007-09 crisis. Using data on 3823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. The volume of capital flows per se has no significant effect on the severity of the credit crunch. However, the composition of capital flows matters a great deal: pre-crisis exposure to non-FDI capital inflows worsens the credit crunch, while exposure to FDI alleviates the liquidity constraint. Similar results also hold when we perform an event study surrounding the Lehman Brothers bankruptcy.
Keywords: capital inflows; liquidity crunch; financial crisis; emerging markets
JEL Codes: F3; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Volume of capital flows (F21) | Severity of credit crunch (E51) |
| Composition of capital flows (F32) | Severity of credit crunch (E51) |
| Pre-crisis exposure to non-FDI capital inflows (F65) | Severity of credit crunch (E51) |
| Pre-crisis exposure to FDI (F21) | Liquidity constraints (E51) |
| Firm's intrinsic dependence on external finance (defwk) (G32) | Stock prices during the crisis (G01) |
| Capital flow composition (F21) | Firm performance (L25) |