Working Paper: NBER ID: w27048
Authors: Laura Alfaro; Ester Faia; Ruth A. Judson; Tim Schmidteisenlohr
Abstract: A confidential dataset with industry-level disaggregation of U.S. cross-border claims and liabilities, shows U.S. securities to be increasingly intermediated by tax-haven-financial-centers (THFC) and less regulated funds. These securities are risky, in intangible-intensive sectors, requiring higher Sharpe ratios; while the foreign-official sector mainly holds Treasuries. Facts on private securities are rationalized through a model where firms with heterogeneous default probabilities, and funded by global intermediaries, endogenously locate affiliates in THFCs. A decline in the cost of funds or in THFC's taxes/regulation, raises profits and firms' incentives to enter THFCs. Firms appear elusively safe, intermediaries reduce monitoring incentives and debt risk increases.
Keywords: Capital Flows; Tax Havens; Risk; Financial Regulation; International Finance
JEL Codes: F21; F32; F34; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower taxes and reduced costs of funds in THFC (G29) | riskier firms enter THFC (G29) |
| entry of firms into THFC (L19) | increased risk as intermediaries reduce monitoring efforts (G34) |
| increased capital flows towards THFC (F32) | higher levels of risk and uncertainty metrics (D81) |
| riskier firms (G32) | seek funding in THFC (I22) |
| flows to THFC (Y10) | positively correlate with Sharpe ratios and intangibility indices (G12) |
| THFC dummy (Y60) | predicts US liabilities and claims (G22) |