Working Paper: NBER ID: w27772
Authors: Fernando Broner; Alberto Martin; Lorenzo Pandolfi; Tomas Williams
Abstract: We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries that are due to the announcements of these countries' inclusion in two major local-currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous stock market effects on domestic firms. Firms operating in tradable industries experience lower abnormal returns than firms in non-tradable industries. In addition, financial, government-related, and firms that rely more on external financing experience relatively higher abnormal returns. The effect on financial and government-related firms is stronger in countries that display larger reductions in government bond yields. The effect on tradable firms is stronger in countries where the domestic currency appreciates more. We provide a stylized model that rationalizes these results. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in emerging economies.
Keywords: sovereign debt inflows; emerging markets; stock market effects; government bond yields; currency appreciation
JEL Codes: F3; F31; F32; F34; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign debt inflow shocks (F65) | Reduction in government bond yields (E43) |
| Sovereign debt inflow shocks (F65) | Appreciation of domestic currency (F31) |
| Reduction in government bond yields (E43) | Increase in cumulative abnormal returns for financial and government-related firms (G32) |
| Appreciation of domestic currency (F31) | Decrease in cumulative abnormal returns for tradable firms (G14) |
| Sovereign debt inflow shocks (F65) | Heterogeneous effects across sectors (D29) |