Foreign Capital and Financial Crises

This dissertation consists of three essays on the impact of foreign capital during episodes of financial crises. In the first two essays, I analyze the impact of proximate exposure to foreign capital markets on crisis-period outcomes of firms from poorly regulated financial systems. In the first essay, I consider the scenario where there is a liquidity crisis in the firms' domestic financial markets. I investigate if East Asian firms, that previously raised portfolio capital through foreign public issuances, underperformed during the Asian financial crisis. I control for selection bias using propensity-score weighted difference-in-difference estimation which is a combination of two empirical strategies - propensity scores and difference-in-difference estimation. I find that firms that had previously raised debt or equity capital abroad had better crisis and post-crisis period outcomes than otherwise comparable local firms. I present evidence that foreign equity-raising firms were less financially constrained than similar local firms, while foreign debt-raising firms appear more financially constrained during and after the crisis. To highlight the liquidity constraints channel, I show that crisis and post-crisis period borrowing ability, and consequently firm outcomes, were impaired by pre-crisis level and composition of firm debt. My analysis underscores that foreign issuances had positive value during the crisis and that firms whose growth plans were based on a mix of foreign equity and debt had better crisis-period outcomes than firms that relied primarily on debt./nIn the second essay, I analyze relative performance of firms, that had previously tapped international capital markets, during a foreign financial crisis. I focus on East Asian firm outcomes during the Global Financial crisis and test if these firms were negatively affected due to their direct linkages with financial markets in U.S. and Western Europe. I find that foreign-capital raising East Asian firms performed no better or no worse than domestically financed firms, during the Global Financial crisis. These results, while unexpected, can be explained somewhat by understanding the characteristics of firms that tap international capital markets. Both foreign-debt and foreign-equity raising firms tend to be very large and 'efficient' firms. There is extensive evidence from previous studies that large and more productive firms face significantly fewer financial constraints in domestic capital markets, during periods of financial crises. When foreign liquidity became scarce for East Asian firms with direct linkages to international capital markets, it appears they were able to supplant their foreign capital gaps with domestic financing. I find evidence that larger foreign-capital raising firms had fewer liquidity constraints during the Global Financial crisis./nThe third essay, a co-authored paper, synthesizes previous studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises, domestic financial development and the strength of institutions. We find reasonably strong evidence that financial openness has positive effects on the growth of financially-dependent industries, although these growth-enhancing effects evaporate during financial crises. Further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well-developed financial systems, good accounting standards, strong creditor rights and rule of law. It suggests that countries must reach a certain threshold in terms of institutional and economic development before they can expect to benefit from capital account liberalization.

Advisor: Eichengreen, Barry