The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis / Hui Tong, Shang-Jin Wei.

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Tong, Hui

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w15207.Publication details: Cambridge, Mass. National Bureau of Economic Research 2009.Description: 1 online resource: illustrations (black and white)Subject(s):

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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.

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Previous	nber w15204 Capital Market Integration and Wages /	nber w15205 Dynamic Trading with Predictable Returns and Transaction Costs /	nber w15206 Do Some Enterprise Zones Create Jobs? /	nber w15207 The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis /	nber w15208 A New Data Set on Monetary Policy: The Economic Forecasts of Individual Members of the FOMC /	nber w15209 Electoral Fraud, the Rise of Peron and Demise of Checks and Balances in Argentina /	nber w1521 Debt and Equity Returns Revisited /	Next

August 2009.

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.