Working Paper: NBER ID: w16528
Authors: Sebnem Kalemli-Ozcan; Herman Kamil; Carolina Villegas-Sanchez
Abstract: We quantify the effects of lending and balance sheet channels on corporate investment during large crises in emerging markets. The depreciated currency creates investment opportunities in the tradable sector but firms might be financially constrained due to: 1) a deterioration of their balance sheet via un-hedged foreign currency debt (balance sheet channel) and 2) a decline in the supply of credit by banks (lending channel). We find that during twin crises, domestic exporters holding un-hedged foreign currency debt decrease investment while foreign exporters with better access to credit increase investment, in spite of their un-hedged foreign currency debt. We do not find such a differential effect under pure currency crises. Using firm-bank matched data during global financial crisis, we show that both domestic and foreign-owned firms experienced a decline in bank credit from affected banks however, foreign-owned firms substituted the lost credit.
Keywords: investment; financial crises; emerging markets; foreign ownership; credit supply
JEL Codes: E32; F15; F23; F36; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic exporters with unhedged foreign currency debt (F31) | Decrease investment during twin crises (G01) |
| Foreign exporters with better access to credit (F14) | Increase investment despite holding unhedged foreign currency debt (G15) |
| Negative liquidity shock during twin crises (F65) | 10 percentage points lower investment for domestic exporters compared to foreign-owned exporters (F23) |
| Access to liquidity (G19) | Mitigate adverse effects of balance sheet vulnerability during crises (F65) |
| Performance of foreign-owned exporters during crises (F44) | Better access to liquidity rather than inherent differences in balance sheet strength (F65) |
| Access to finance (O16) | Differentiate investment behavior between domestic and foreign-owned firms during financial crises (F23) |