metadata: authors: 0: author: Abraham,Facundo
1: author: Cortina Lorente,Juan Jose
2: author: Schmukler,Sergio L.
count: East Asia and Pacific
docna: 0: docna: The Rise of Domestic Capital Markets for
            Corporate Financing : Lessons from East Asia
docty: Policy Research Working Paper
subtopic: Financial Sector Policy,Non Bank Financial Institutions,Mutual Funds,Capital Flows,Capital Markets and Capital Flows,International Trade and Trade Rules,Securities Markets Policy & Regulation
teratopic: Finance and Financial Sector Development,International Economics and Trade
abstracts: cdata!: Firms from emerging economies have
            significantly increased the amount of bond financing,
            particularly after the Global Financial Crisis and when
            compared to other financing instruments. The literature
            links this growth to a rise in international bond issuances
            as the supply of capital by foreign investors expanded. This
            paper explores the role of domestic markets by comparing
            domestic and international bond issuances by East Asian
            firms, which are the most active bond issuers in emerging
            economies. The paper shows that an expansion in domestic
            bond issuances, in domestic currency, by more and smaller
            firms was the main component behind the overall growth in
            bond financing. This expansion was accompanied by a decline
            in bond yields, higher firm leverage, and higher cash
            accumulation following issuances after 2008. The evidence is
            consistent with a higher supply of funds by domestic
            investors being an important driver behind the rise in
            domestic bond financing.
repnme: repnme: The Rise of Domestic Capital Markets for
            Corporate Financing : Lessons from East Asia
display_title: The Rise of Domestic Capital Markets
            for Corporate Financing : Lessons from East Asia
listing_relative_url: /research/2019/05/31049353/rise-domestic-capital-markets-corporate-financing-lessons-east-asia
topicv3: Non-Government Bond Markets m1326511 333,Trade m1326924 698,Capital Markets m1326967 332,Mutual Funds m1326970 2180,Financial Sector Development m1327681 1920
publishtoextweb_dt: 2019-05-07T00:00:00Z
historic_topic: Finance and Financial Sector Development,International Economics and Trade
no_of_pages: 54
author_keys: 0: author_key: 1511043
1: author_key: 1266460
2: author_key: 142794
model_extractions: Policy Research Working Paper 8844 The Rise of Domestic Capital Markets for Corporate Financing Lessons from East Asia _Facundo Abraham Juan J. Cortina Sergio L. Schmukler_ Development Economics Development Research Group May 2019
Policy Research Working Paper 8844

# **Abstract**

Firms from emerging economies have significantly increased the amount of bond financing, particularly after the Global Financial Crisis and when compared to other financing instruments. The literature links this growth to a rise in international bond issuances as the supply of capital by foreign investors expanded. This paper explores the role of domestic markets by comparing domestic and international bond issuances by East Asian firms, which are the most active bond issuers in emerging economies. The paper shows that an expansion in domestic bond issuances, in domestic currency, by more and smaller firms was the main component behind the overall growth in bond financing. This expansion was accompanied by a decline in bond yields, higher firm leverage, and higher cash accumulation following issuances after 2008. The evidence is consistent with a higher supply of funds by domestic investors being an important driver behind the rise in domestic bond financing.

This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at fabraham@worldbank.org, jcortinalorente@worldbank.org, and sschmukler@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **The Rise of Domestic Capital Markets for Corporate Financing: Lessons from East Asia**

Facundo Abraham Juan J. Cortina Sergio L. Schmukler<sup>*</sup> _Updated October 2020_

**JEL Classification Codes:** F33; G00; G01; G15; G21; G23; G31

**Keywords:** corporate bond markets; domestic markets; firm financing; institutional investors; international financial markets; syndicated loan markets

* We are grateful to Ashraf Bin Arshad, Irina Astrakhan, Ana Maria Aviles, Thorsten Beck (the Editor), Anderson Caputo, Jian Chen, Jose de Luna Martinez, Tatiana Didier, Catiana Garcia-Kilroy, Aart Kraay, Norman Loayza, Andrew Mason, Sudhir Shetty, two anonymous referees, various financial sector experts at the World Bank, and participants at presentations held at the Malaysia Securities Commission and the World Bank (Kuala Lumpur and Washington, DC) for helpful comments and data. We are grateful to Marta Guasch for excellent research assistance. We received financial support from the World Bank East Asia and Pacific Region, the Finance, Competitiveness, and Innovation Global Practice at the Malaysia Knowledge and Research Hub, the Knowledge for Change Program, the Research Support Budget, and the Strategic Research Program.

Email addresses: fabraham@worldbank.org; jcortinalorente@worldbank.org; <u>sschmukler@worldbank.org.</u>
# **1. Introduction**

Firms in emerging economies have significantly increased the amount of financing raised in bond markets during the 1990s and 2000s, following the financial liberalizations that started in the early 1990s (World Bank, 2005). International issuance activity was a key component of this expansion before the 2008-09 Global Financial Crisis (GFC). International issuances further accelerated after the GFC, driven by foreign investors searching for yield in emerging market securities and generating favorable liquidity conditions. This increase in international bond issuances contributed to a surge in corporate debt and corporate vulnerability in emerging economies (IMF, 2015, 2019).

In this paper, we use the experience of East Asia to study the role of domestic bond markets vis-à-vis international ones. Whereas an extensive literature has documented the trends in international issuances, especially after the GFC, less is known about the domestic issuance activity by emerging market firms. Our analysis of the role of domestic markets is two-fold. First, we examine the growth in bond issuance activity in both domestic and international markets since the 1990s, changes in the relative size of these markets over time, and the firms behind the capital raising activity in each market. Second, we examine whether the evolution of domestic bond issuances after the GFC was more likely driven by changes in the behavior of investors (supply side of capital) or firms (demand side of capital), as well as the implications of increased bond issuances for firms.

The distinction between international and domestic market issuance activity is important because it is unclear ex ante to what extent emerging market firms have been using domestic markets. In an increasingly globalized world where financial transactions can take place anywhere, access to international financial markets allows firms to raise capital and trade their securities abroad and domestic investors to buy those securities in international markets, bypassing domestic markets (Henderson et al., 2006; Gozzi et al., 2010). Therefore, preference for deeper and more liquid international bond markets might have translated into more irrelevant domestic markets (Claessens et 1
al., 2002; Levine and Schmukler, 2006). On the other hand, even when barriers to financial transactions are removed, frictions (such as information asymmetries, fixed transactions costs, or tax treatments) can still cause market segmentation to persist (La Porta et al., 1997; Karolyi and Stulz, 2003; Pirinsky and Wang, 2006; Bekaert et al., 2011; Colla et al., 2013). Therefore, market specific developments can be important for firms and investors participating in those markets.

We focus on East Asia for different reasons. First, corporate issuances in East Asia account for most of the capital market activity in emerging economies as a whole. The amount of bonds raised by East Asian firms during 1990-2016 accounted for about 70 percent of the total amount raised by firms from emerging regions in domestic and international markets. Second, East Asia weighs heavily in international benchmark indexes, which international investors widely use to allocate funds across economies (The Economist, 2019). This interest by international investors might push firms to raise capital in international markets in detriment of domestic markets. Third, following the 1997-98 Asian Financial Crisis (AFC), policy makers in the region have made a conscious effort to develop domestic bond markets as an alternative to international financing. By comparing bond issuance activity in East Asia with that in other regions, we can examine how international and domestic markets have developed over time, whether they act as substitutes or complements, and how the supply and demand of capital behave when financing takes place in different markets.

To perform the analysis on issuance activity and types of issuing firms, we use transactionlevel data on corporate bonds issued in domestic and international (cross-border) markets over 19902016. The data include 81,194 bond issuances conducted by 13,084 firms from East Asian economies. The analysis focuses on the largest 10 economies in the region in terms of gross domestic product (GDP). We account for the heterogeneity in these economies by computing the main patterns in the paper for different country groups and by estimating trends at the economy-industry level and using fixed effects, such that large economies do not drive the results. The data comprise the universe of 2
East Asian issuers, including firms listed in stock exchanges and unlisted firms. To explore which investors purchased the issued securities, we analyze the portfolios of mutual, pension, and insurance funds using data at the security level. To examine how firms used the funds raised in domestic markets, we merge the transaction-level data with firm-level balance sheet and income statement data.

The evidence shows that the most significant part of the expansion in bond issuance activity between 1990 and 2016 occurred in domestic bond markets, especially after 2008, surpassing the activity in international markets. The annual amount raised in domestic (international) bonds increased by about 381 (58) percent between 1990-98 and 2008-16. As a result, the share of bond financing obtained domestically increased over time, becoming firms’ main source of bond financing since 2008. Between 1990-98 and 2008-16, the average share of domestic bonds relative to the total annual amount raised (domestic plus international bonds) increased from 21 to 69 percent. Most of the bonds raised since 2008 were denominated in domestic currencies. Moreover, this growth in domestic markets comprised the participation of more and smaller issuing firms. The annual number of issuing firms in domestic bond markets increased 125 percent and the size of the typical issuer of domestic bonds declined by 30 percent when comparing 1990-98 and 2008-16. Instead, the number of issuing firms and the size of the typical issuer in international markets barely changed between these two periods.

We then study whether the acceleration in domestic bond issuances in 2008-16 was more likely driven by an increased appetite for domestic bonds by investors (supply-side expansion) or by a higher demand of capital by firms (demand-side expansion). If a supply-side expansion by investors seeking to buy bonds was the main force behind the acceleration in domestic bond financing, we could observe a decline in bond issuance yields, higher leverage growth for new (smaller) issuers relative to recurrent (larger) issuers, and an accumulation of issuance proceeds in cash as firms took advantage of favorable liquidity conditions to raise more debt than the amount needed to finance existing operations. If, on the other hand, an increasing demand for capital by firms was the main factor behind the acceleration 3
in bond issuances, we might see that domestic bond yields increased (to the extent that other factors remained constant), a similar movement of yields in other debt markets where firms borrowed, similar increases in leverage across borrowing firms, and that firms utilized most of the bond proceeds.

We find that the rise in East Asian domestic bond markets occurred while bond yields substantially declined. East Asian firms issued domestic corporate bonds in 2008-16 at a cost 42 percent lower (measured as the yield to maturity) than in 2000-07. In contrast, yields of international bond issuances declined by 29 percent, whereas the cost of borrowing from banks through syndicated loans increased. Domestic investors, with substantial and growing funds, increased their investment in domestic markets and were the main buyers of domestic securities, contributing to the decline in the cost of capital in those markets.

Our results also show that the developments in domestic markets had important implications for issuing firms. In particular, the new firms that started issuing bonds in domestic markets in 200816 accumulated debt faster than assets, increasing their leverage positions more than firms that had already issued bonds prior to 2008. Although these firms increased their investments, their financial performance worsened relative to the period prior to 2008, as measured by the interest coverage ratio (ICR) and return on equity (ROE). Furthermore, the relatively cheaper domestic bond financing was associated with high cash accumulation by the bond issuers. In particular, cash accumulation was the most important use of funds for bond issuers (about 40 cents per dollar raised) and the average amount of cash saved per bond issuance was significantly higher in 2008-16 than in previous years. Overall, our evidence is consistent with a supply-side expansion by domestic investors being the main force driving the rise of domestic bond markets in East Asia since the GFC, impacting the firms that gained access to that type of financing.

Our paper contributes to the growing literature studying the rise of corporate debt in emerging economies since the GFC. This literature associates the increase in corporate debt with a surge in 4
international bond issuances as a result of an expansion in the supply side of capital by foreign investors that lowered the cost of capital in international markets (Shin, 2014; Turner, 2014; McCauley et al., 2015; Caballero et al., 2016; Burger et al., 2018a). There is evidence that emerging market firms kept large amounts of international bond issuance proceeds in cash (Bruno and Shin, 2017; Calomiris et al., 2019). The literature mentions at least two reasons to explain why firms might save a large share of issuance proceeds in cash during favorable liquidity conditions generated by supply-side expansions. One reason is that a lower cost of capital prompts firms to borrow more than the amount needed to finance existing operations, saving a large fraction of the proceeds in cash for precautionary motives or for future operations (Erel et al., 2012; Xiao, 2018; Acharya et al., 2020). The other reason is that international issuers could exploit carry trade opportunities by issuing debt in foreign currency at low rates and parking the proceeds in domestic instruments, profiting from <mark>higher interest rates and domestic currency appreciations</mark> (Shin and Zhao, 2013; Acharya and Vij, 2016; Bruno and Shin, 2017). The literature also argues that greater bond financing increased vulnerability of emerging market firms, as evidenced by higher leverage, solvency risks, and currency mismatches (Acharya et al., 2015; Chui et al., 2014, 2016; Beltrán et al., 2017; Chang et al., 2017; Alfaro et al., 2019).

We complement this literature by showing that in East Asia the most significant part of the expansion after the GFC occurred in domestic corporate bond markets rather than in international ones. This evidence has implications for the aggregate financing patterns of emerging economies given that East Asia is the largest and fastest growing emerging region in terms of bond issuance activity. Our findings also suggest that the growth of domestic issuance activity was associated with an increase in the supply side of capital by domestic investors in domestic bond markets. This type of relation between issuances and investors also manifests in international bond markets, where the growth in international issuances was linked to foreign investors. Whereas carry trade opportunities could explain the rise of international issuances in foreign currency at cheap international interest rates (as 5
mentioned in the literature), our evidence on domestic bond issuances in domestic currency points to other factors also being important, such as increased cheap financing at home that led firms to accumulate cash for future needs. Adding to the literature documenting higher solvency risks and leverage following the GFC, our results suggest that these risks might have been concentrated among the new and smaller domestic bond issuers. However, these risks could be mitigated by the higher amount of cash savings (which could be used during negative shocks) and the domestic currency nature of the bonds raised.

Our paper also relates to the literature that focuses on capital market development in East Asia. After the AFC, policy makers in the region implemented several policy initiatives to promote domestic bond financing and reduce firms’ overreliance in foreign currency debt. This literature examines the effectiveness of these policies and whether they could be useful for emerging economies in general. Using aggregate data, several papers argue that policy initiatives after the AFC seem to have increased the availability of domestic bond financing for firms in East Asia (Eichengreen et al., 2006; Spiegel, 2012; Ayala et al., 2015; Kang et al., 2015; Kowalewski and Pisany, 2019). Consistent with the aggregate patterns, studies using firm-level data also find evidence that policy initiatives implemented during 1995-2007 increased firms’ access to domestic bonds and the share of long-term debt in firms’ balance sheets, especially for less risky and more profitable firms (Mizen et al., 2012; Mizen and Tsoukas, 2014; Bose et al., 2019).

We add to this literature in at least three different ways. First, our paper is the first to formally compare domestic versus international bond issuance activity, showing an overall change in market composition in East Asia since the early 1990s. This analysis complements the finding in the literature that shows an increase in domestic bond financing during 1990-2007. Second, whereas the existing literature focuses on changes in domestic debt financing in the early 2000s (when domestic policies were implemented), our paper highlights the developments after the GFC (when domestic and 6
international markets were already well established). We document a faster acceleration of domestic bond issuances during the post-GFC period. Third, our paper is the first study that sheds light on whether supply or demand factors were behind the rise in domestic bond financing in East Asia since 2008. Our evidence that a supply-side expansion of capital by investors has largely driven the rise in domestic bond issuances after the GFC could mean that East Asian firms have become more vulnerable to changes in market conditions. On the other hand, the increasing use of domestic bond markets implies lower firm vulnerability to currency depreciations and that large firms can turn to these markets when negative shocks occur in international markets.

The remainder of the paper is organized as follows. Section 2 describes the data and methodology. Section 3 exploits transaction-level data to examine the growth of domestic and international bond financing and the types of firms behind the issuance patterns. Section 4 examines the cost of issuances and the role of different investors (the supply side of capital). Section 5 analyzes the behavior of firms (the demand side of capital) by studying the evolution of firms’ financial statements and the use of bond proceeds. Section 6 concludes.

# **2. Data**

# _2.1. Sample of Economies_

The analysis in this paper focuses on the 10 largest economies in East Asia in terms of GDP: China, Hong Kong SAR, Indonesia, Malaysia, the Philippines, the Republic of Korea, Singapore, Taiwan, Thailand, and Vietnam. The data set contains 13,084 unique firms issuing in bond markets and 81,194 bond issuances over 1990-2016 (Table 1, Panel A). To benchmark against other regions of the world, we also analyze data from other emerging economies (in Eastern Europe and other Asia, Latin America, and the Middle East and Africa) and from advanced economies (in North America, Western 7
Europe, and Japan). Appendix Table 1 provides the list of economies included in each group. All values in the paper are reported in constant 2011 U.S. dollars.

To avoid capturing the trends in the largest economy (China) or in the most financially developed economies in the sample, we show results for the median economy and run regressions at the economy-industry-year level with economy-industry fixed effects.<sup>1</sup> Because bond issuance activity could have grown at different speeds across East Asian economies, we report our main regression results not only for all East Asian economies but also for three separate country groups: East Asia without China, advanced East Asia (Hong Kong SAR, Korea, Rep., Singapore, and Taiwan), and developing East Asia (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam). We treat China differently because its capital markets are very large compared to those in other East Asian economies and underwent a different reform process over our sample period. In the mid-late 2010s, China opened its relatively closed capital markets to allow foreign investors to invest in domestic markets.<sup>2</sup> By 2016, Chinese equity and bond markets were the largest among East Asian economies and the second largest in the world after those in the United States.

# _2.2. Transaction-level Data_

To study the bond issuance activity in East Asia, we use comprehensive, transaction-level data on corporate bonds issued in domestic and international markets over 1990-2016. The data come from

> 1 We divide industries across nine main categories using the first digit of the Standard Industrial Classification (SIC) codes: agriculture, forestry, and finishing; construction; finance, insurance, and real state; manufacturing; mining; retail trade; transportation and utilities; wholesale trade; and other services. Only economy-industry-year observations with reported issuance activity (of any type) are included in the regressions.

> 2 Qualified Foreign Institutional Investors (QFII) were introduced in 2002, allowing certain foreign institutions to purchase equity and bonds issued onshore by Chinese firms. The Renminbi Qualified Foreign Institutional Investors (RQFII) were introduced in 2011 as an alternative for foreign investors to purchase China’s onshore securities. The opening of Chinese capital markets continued during 2014. Launched in November 2014, Shanghai–Hong Kong Connect allows global investors to purchase stocks and bonds listed in Mainland China through the Hong Kong Stock Exchange. The platform also allows institutional investors from Mainland China to access securities listed in Hong Kong SAR.

8
Refinitiv’s Security Data Corporation (SDC) Platinum, which provides transactions of new issuances of common and preferred equity, as well as publicly and privately placed bonds.<sup>3</sup> Because the analysis focuses on corporate financing, we exclude all public sector issuances, comprising issuances by national, local, and regional governments, government agencies, regional agencies, and multilateral organizations. We also exclude mortgage-backed securities and other asset-backed securities.

We classify bond issuances as domestic or international using the residence-based approach followed by the Bank of International Settlements (BIS). We compare the location of the issuance with the residence of the issuing firm (Gruić and Wooldridge, 2012). Domestic securities are those issued by residents in their local markets. International issuances are those issued by residents abroad.<sup>4</sup> Using this methodology, the data set includes 71,489 bond issuances in domestic markets and 9,703 bond issuances in international markets (Table 1, Panel A). Besides the residence-based approach, the literature uses two alternative criteria to classify international and domestic corporate bond issuances: the nationality-based and currency-based approaches (Gruić and Wooldridge, 2012; Avdjiev et al., 2014; Shin, 2014; McCauley et al., 2015). The nationality-based approach considers the nationality of a firm instead of its residence. Therefore, issuances by a subsidiary of a foreign-owned firm in the domestic market are considered as international, as the parent company resides outside the domestic market. Under the currency-based approach, debt issuances denominated in foreign currency are considered as international, and those in local currency as domestic. Because our paper focuses on the role of domestic markets for firms located in East Asia, we use the classification of issuances by the residence approach as our main results. But for robustness we also use the nationality-based and

> 3 Refinitiv’s SDC Platinum is one of the most widely used databases on transaction-level research (Henderson et al., 2006; Kim and Weisbach, 2008; Bruno and Shin, 2017). Dealogic, an alternative database, yields similar estimates of issuance activity.

> 4 In the case of China, domestic issuances are those performed by firms residing in Mainland China and issuing in Mainland China’s bond markets (Shanghai, Shenzhen, and over-the-counter markets). Therefore, we consider issuances in Hong Kong SAR by firms residing in Mainland China as international issuances.

9
currency-based approaches to estimate the growth of domestic vis-à-vis international bond issuances. The results are robust to using these two alternative measures.

For some parts of the analysis we use equity and syndicated loan data, which also come from SDC. The equity data include 43,196 issuances by 13,860 firms (Table 1, Panel B). We classify equity issuances into domestic and international using the residence-based approach. We use syndicated loans because, unlike typical bank loans, they are available for all economies. Moreover, syndicated loan markets capture a sizable share of bank financing and are the most relevant comparison to capital markets in terms of transaction size (amount raised per issuance) and terms of financing, such as debt maturity (Ivashina and Scharfstein, 2010; Cerutti et al., 2015). The syndicated loan data include 25,493 issuances by 9,606 firms (Table 1, Panel C). To distinguish between domestic and international (crossborder) syndicated loans, we compare the nationality of the lead bank that arranges the deal with the residence of the issuing firm. Domestic loans are those in which only domestic banks lead the syndication, whereas international syndicated loans entail the participation of at least one foreign bank acting as a lead arranger.

# _2.3. Firm Size Measure and Firm-level Data_

To study the types of firms issuing in domestic and international markets, we focus on size. We follow the literature that typically uses firm size or collateral to measure access to debt across markets, firms, and over time (Pagano et al., 2002; Beck and Dermirguc-Kunt, 2006; Claessens and Schmukler, 2007; Beck et al., 2008; Campello and Larrain, 2016; de la Torre et al., 2017).

The literature on firms’ issuance activity tends to study the size of issuers through balance sheet data using, for example, firms’ assets.<sup>5</sup> The downside of this approach is that balance sheet data

> 5 See, for example, Pagano et al. (2002), King and Segal (2009), Adrian et al. (2013), Becker and Ivashina (2014), Didier et al. (2015), and Bruno and Shin (2017).

10
are usually available for firms listed in stock exchanges across a wide set of economies, but not for unlisted firms that conduct issuances and constitute about 60 percent of all corporate bond issuers (Table 1).<sup>6</sup> As an alternative measure of size that is comparable across firms and covers the whole universe of issuers, we proxy firm size by the average amount raised per issuance, measured over all issuances per firm during 1990-2016.

To make sure that the average amount raised is a reasonable proxy for issuer size, we plot the average amount raised and the average assets (also from SDC) for listed firms. The scatter plot shows a high correlation between the two size variables (Appendix Figure 1, Panel A). Regressions of the log of average assets on the log of the average amount raised per issuance yield a point estimate of 0.99, not statistically different from one but statistically different from zero. To the extent that a similar correlation exists for unlisted firms, the average amount raised should be a reasonable proxy for the analysis of issuer size. A comparison of the firm size distribution (FSD) of listed and unlisted bond issuers illustrates the importance of using a comprehensive and complete measure of firm size. Focusing on the bottom quantiles, the FSD of unlisted bond issuers lies to the left of the FSD of listed issuers, indicating that the smallest firms tapping bond markets are unlisted (Appendix Figure 1, Panel B). If we were to use assets from only listed firms, we would be disregarding the smallest bond issuers.

To link capital raising issuances with firms’ balance sheet and income statement data, we merge the transaction‐level data from SDC with financial statement information for publicly listed firms from Worldscope. Using these data, we could also check that our results on firm size are not specific to the proxy we use. We explored two alternative measures of firm size from the Worldscope data: total assets and net sales, taking the end-of-year values reported by firms. Both sets of results with the alternative measures are qualitatively and quantitatively similar to the ones reported in the paper.

> 6 This statement also holds when considering as “listed firms” subsidiaries owned by listed parent companies.

11
# _2.4. Institutional Investors Data_

To analyze what types of investors are behind the purchases of East Asian corporate bonds, we use data on foreign and domestic investors for 2008-16. The data come from different sources and with different breakdowns. Regarding foreign investors, we have data on East Asian corporate bond holdings by all types of investors from the United States (U.S. investors) as well as mutual funds domiciled outside East Asia (including mutual funds in the United States). The former come from the U.S. Treasury International Capital (TIC) System, whereas the latter come from information collected by Calomiris et al. (2019). East Asian corporate bonds are those issued by a firm located in East Asia either in an East Asian market or an international market.

Regarding domestic investors, we collect data on security holdings for pension and insurance as well as mutual funds. Data on investments by pension and insurance funds cover Hong Kong SAR, Korea, Malaysia, and Taiwan and come from the financial supervisory authorities, insurance associations, and pension fund websites. For these investors, we typically have data on their total security holdings, which include public bonds, corporate bonds, and equity from issuers located in East Asia and abroad. These data distinguish whether a pension/insurance fund holds securities issued in their own local capital market or abroad. For Hong Kong SAR, we have data on pension funds only. For pension funds in Korea, we have additional data on corporate bond holdings. For East Asian mutual funds, we have data on their East Asian corporate bond holdings (issued in East Asian and international markets).

# **3. Corporate Bond Financing: Domestic vs. International Markets**

We document the role of domestic and international bonds markets in East Asia in terms of issuance activity and types of firms using each market, focusing on three periods, 1990-98, 1999-2007, and 2008-16. This allows us to compare trends before and after two important milestones: (i) the AFC 12
(followed by efforts in East Asia to promote domestic markets), and (ii) the GFC (after which foreign investors prompted a boom in international issuances in emerging economies).<sup>7</sup>

# 3.1. _Issuance Activity_

Since the early 1990s, firms in East Asia have significantly increased the amount of funds raised in capital markets. Whereas equity issuance activity grew as fast as GDP, bond financing grew faster than GDP and rapidly accelerated after 2008 (Figure 1, Panel A). The patterns in bond market financing in East Asia contrast with those in syndicated loan financing, for which the annual amount raised as a ratio of GDP fell over time.<sup>8</sup> Importantly, the fastest expansion in corporate bond financing took place through domestic markets (Figure 1, Panel B). Of the total amount raised in domestic bonds during 1990-2016, 5 percent was raised in 1990-98, 11 percent in 1999-2007, and 84 percent in 200816. These patterns hold when China is excluded from the sample.

To formally assess to what extent the use of domestic and international markets were behind the rise in bond issuance activity in East Asia, we run panel regressions of the log (1+the annual amount raised) by each industry in each East Asian economy during 1990-2016 on dummy variables for the periods 1999-2007 and 2008-16. We use the period 1990-98 as the base, so we omit the dummy for these years. The regressions include economy-industry fixed effects to control for differences across economies and industries that are constant over time. We cluster standard errors at the economy-industry level, as we do for other regressions in the paper. We estimate separate models for domestic and international issuances.

The estimated coefficients confirm that that domestic issuance activity was the main component of the growth in bond financing by East Asian firms at the economy-industry level (Table

> 7 Patterns in equity markets are reported in the working paper version of the paper (Abraham et al., 2019).

> 8 Although there is heterogeneity in the levels of issuance activity across economies in East Asia, the reported trends tend to hold across them (Appendix Figure 2, Panel A).

13
2, Panel A). Between 1990-98 and 2008-16, the annual amount of bonds raised domestically per economy-industry increased 381 percent. International issuances also grew between these periods, which is consistent with the messages in the literature, but this growth was much slower than the growth of domestic issuances (58 percent). These patterns hold when China is excluded from the sample, for advanced East Asian economies alone, and for developing East Asian economies alone. Furthermore, findings are robust to the two alternative definitions of international issuances described in the data section: by nationality of issuers and by currency (Table 2, Panels B and C). These latter results imply that the reliance on domestic currency bond financing by East Asian firms at the economy-industry level increased significantly over time.<sup>9</sup> As the amount issued domestically grew faster than internationally, the share of total bond financing raised through domestic markets increased. After 2008, domestic markets surpassed international markets as the main source of bond financing for firms (Figure 2). In the median East Asian economy, the share of domestic bonds over the total raised per year increased from 36 percent to 80 percent between 1990-98 and 2008-16.<sup>10</sup> In contrast, most of the bonds issued by firms from advanced and emerging economies outside East Asia were raised in international markets during 200816. To formally estimate the shift in issuance market composition in East Asia, we run panel regressions of the share of the total amount raised in domestic markets per economy, industry, and year during 1990-2016 on dummy variables for the different periods and economy-industry fixed effects. The estimates imply that domestic bond issuances accounted for 21 percent of the total proceeds raised annually per industry across East Asian economies in 1990-98, but this share increased

> 9 Wald tests of equality of coefficients confirmed that the differences in trends between the amount raised in domestic and international markets in Table 2 are statistically significant at the 1 percent level. These tests were computed within each of the subsamples of economies and for the alternative definitions of international issuances. To make the table more concise, these tests are not reported in the paper.

> 10 The trend of a growing share of bonds raised in domestic markets tends to hold for every East Asian economy (Appendix Figure 2, Panel B).

14
to 69 percent in 2008-16 (Table 3). Again, this pattern holds across the different subsamples of East Asian economies.<sup>11</sup>

# _3.2. Firms behind the Expansion in Domestic Markets_

The growth in domestic bond financing in East Asia was accompanied by an increasing number of firms using bond markets, that is, by an expansion in the extensive margin (Figure 3, Panel A). In the median East Asian economy, the annual number of issuers in domestic bond markets increased more than six-fold (from 11 to 70) between 1990-98 and 2008-16. In contrast, the annual number of issuers in international markets declined (from 12 to 7) between the same periods. Moreover, the growth in the extensive margin was driven by smaller firms accessing capital markets. In the median East Asian economy, the size of the median bond issuer declined by 20 percent between 1990-98 and 2008-16 (Figure 3, Panel B). This overall pattern contrasts with that in other emerging and advanced economies, where the growth in the number of bond issuers was significantly slower and the median issuer size increased over the sample period.

We run economy-industry level regressions to formally measure the extent to which the rise in domestic bond financing in East Asia was associated with an expansion in the number of issuers and a reduction in the issuer size. We estimate panel regressions of (i) the log (1+the number of issuers) and (ii) the log of size of the median issuer per economy, industry, and year during 1990-2016 on dummy variables for the different periods, in addition to economy-industry fixed effects. The estimates confirm that domestic markets underwent a statistically significant growth in the number of

> 11 As a robustness, we repeated the analysis in Section 3.1 for non-financial sector issuers (based on residence and currency) and firms whose ultimate parent is a non-financial sector firm (nationality basis). The results for non-financial firms were very similar to the ones reported in the paper. Furthermore, the main results of this paper remained when excluding firms with some degree of government ownership, including stated-owned enterprises (SOEs). These firms accounted for 18 percent of the total issuance activity by East Asian firms during the sample period. The results also held for firms with some degree of government ownership, excluding the rest. For conciseness, we do not report all these robustness tests in the paper.

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issuers (Table 4, Panel A). Specifically, the number of annual issuers was about 125 percent higher in 2008-16 when compared to 1990-98. In contrast, the number of annual issuers in international markets increased only 11 percent over the sample period.<sup>12</sup> The estimates also show that the median firm issuing in domestic bond markets was smaller in 2008-16 relative to previous periods (Table 4, Panel B). The size of the typical issuer in domestic markets per economy-industry declined by around 30 percent in bond markets during 2008-16, whereas the size of international issuers remained constant over the same period.<sup>13</sup> For a broader perspective, we compare the use of domestic and international bond, equity, and syndicated loan markets across firms of different size. We classify issuers into ten deciles by size and examine the share of firms, per decile, issuing in different markets during 1990-2016. The results show that, whereas the relatively smaller issuers use almost entirely domestic equity and bond markets, larger firms tend to use a wider set of instruments issued in different locations (Figure 4). In the first decile (the smallest issuers), 97 percent of the firms were domestic equity and/or domestic bond issuers, whereas only 7 percent of those firms issued in other markets. Relatively larger firms also used domestic capital markets, but they raised capital across markets in a more balanced manner.<sup>14</sup> Because smaller firms are typically younger, this pattern of financing across firm size is consistent with a pecking order that suggests that firms use domestic markets first and, then, access international and syndicated loan markets at a later stage, when they become larger.<sup>15</sup>

> 12 Wald tests of equality of coefficients confirmed that the differences in trends between the numbers of domestic and international issuers in Table 4, Panel A are statistically significant at the 1 percent level. These unreported tests were computed within each of the subsamples of economies. 13 For robustness, we run regressions using total assets of listed firms (instead of our proxy based on issuance size) and find an even larger decline in the size of domestic bond issuers between 1990-98 and 2008-16 (Appendix Table 2). 14 The fact that the sum of different types of issuers is close to 100 percent in the first decile means that most of the smallest issuing firms raised funds in only one (domestic) market. The sum of these percentages does not need to be 100 percent because firms in each decile can issue in more than one market and thus belong to more than one group of issuers. 15 There is a high correlation between firm size (in terms of assets) and age. Using Worldscope data on listed East Asian firms, a 1 percent increase in age is associated with a 0.5 percent increase in size.

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# **4. Cost of Issuances and Role of Investors**

In this section, we first study whether the supply side of financing (investors) was a force behind the observed acceleration in domestic bonds issuances by East Asian firms. We do so by analyzing the cost of issuances. We focus on the period after 2008 because, during those years, domestic bond issuances grew the most, domestic markets became the main source of bond financing for firms, and a significant number of new and smaller firms started to borrow bonds.

Movements in the cost of issuances are informative because a decline in the cost of capital suggests that the liquidity provided by investors grew faster than firms’ demand for new financing.<sup>16</sup> We also compare trends in the cost of issuance in domestic debt markets with those in other debt markets. In particular, we use international bond markets and (domestic and international) syndicated loan markets. This comparison can provide insights on whether the observed patterns were economywide or specific to some financial markets.

To measure the change in issuance costs across debt markets after the GFC, we run regressions estimating the change in the yield to maturity for bonds and in the spread over LIBOR for syndicated loans between 2000-07 and 2008-16. The regressions include a dummy for the period 2008-16 and several controls: public or private issuance, ownership of issuer, type of coupon, currency, maturity fixed effects, and economy-industry fixed effects.<sup>17</sup> The estimates show that East Asian firms issued corporate bonds in 2008-16 at yields about 39 percent lower than in 2000-07 (Table 5). Moreover, these regressions show that yields declined more for domestic than for international issuances. In particular, yields of domestic and international bonds declined by about 42 and 29 percent, respectively, between 2008-16 and 2000-07, at the same

> 16 An increase in demand (albeit slower than the increase in supply) could still have occurred (di Giovanni et al., 2019). 17 We do not collapse these regressions at the economy-industry level given the large number of controls. These regressions exclude China because of its large weight in the issuance data. But including China does not change the results.

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time that domestic issuances increased more than international ones. The patterns in corporate bond markets contrast with those in syndicated loans. The issuance cost in syndicated loan markets actually increased for East Asian firms during 2008-16.<sup>18</sup> The decline in the issuance cost of international bonds is consistent with the argument in the literature that an increase in the supply of bond financing drove the rise in international bond issuances after the GFC. Importantly, the larger decline in the issuance cost of domestic bonds implies that the supply side of funds (investors’ demand) for domestic bonds grew even faster than that for international bonds.

Given that the supply of financing was an important factor behind the growth of domestic bond issuances, we examine whether domestic or foreign investors were behind the purchases of East Asian securities. This distinction is not trivial as these investors tend to differ in their portfolio choices, investment horizons, volatility, and type of financing offered, bringing distinctive benefits and risks (Ferreira and Matos, 2008; Karolyi, 2016; Martinez Peria and Schmukler, 2017). We study the investment behavior of foreign investors (all U.S. investors and foreign mutual funds) and domestic institutional investors (East Asian pension, insurance, and mutual funds) since the GFC.

We find that foreign investors increased their U.S. dollar investments in corporate bonds issued by East Asian firms after 2008 and predominantly purchased East Asian corporate bonds issued in international markets. Holdings of East Asian corporate bonds by U.S. investors increased from $21 billion to $27 billion between 2008 and 2016. Holdings of foreign mutual funds increased from $13 billion to $75 billion during the same period. The share of bonds issued in international markets represented, on average, 96 and 99 percent of the East Asian corporate bonds held by U.S. investors and foreign mutual funds during 2008-16, respectively (Figure 5).

> 18 The fact that the syndicated loan prices increased while firms increased their issuances in bond markets could be consistent with a negative supply shock in the banking system that drove firms to switch toward bond markets (Becker and Ivashina, 2014). If this was the only factor behind the larger issuance of bonds, we would expect an increase in bond yields (as firms increased their demand for this security) and an overall constant level of debt (as firms simply reshuffled their financing sources). However, bond yields significantly declined after the GFC, while bond issuers substantially increased the overall amount of debt issued.

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Domestic investors in East Asia also increased their investments in East Asian securities post 2008 and mostly bought securities issued in the same market where they were domiciled. East Asian pension and insurance funds multiplied their holdings of securities (equity, corporate bonds, and public bonds) by about 2.4 times between 2008 and 2016. On average, 74 percent of security investments by these investors were held in securities issued in their own domestic markets during 2008-16. We find similar patterns when focusing only on corporate bond holdings by pension funds in Korea, for which the share of domestic corporate bonds holdings was even larger, averaging 93 percent during the period (Figure 6, Panel A). East Asian mutual funds increased their holdings of East Asian corporate bonds from $12 billion to $60 billion between 2008 and 2016. During this period, the share of East Asian corporate bond holdings issued in East Asian markets was, on average, 93 percent (Figure 6, Panel B).

In sum, this evidence for East Asia suggests that foreign investors were the main buyers of securities issued in international markets, whereas domestic investors were the main buyers of securities issued in domestic markets. This evidence is consistent with the view that institutional investors tend to buy securities issued in their own markets, and with the <mark>home bias in investors’ decisions documented in the literature (Burger et al., 2018b; Maggiori et al., 2020).</mark>

# **5. Firm Performance and Use of Funds**

Next, we focus on the behavior of the demand side of financing (firms) by examining the reaction of different firms that issued in East Asian domestic bond markets. We analyze the evolution of their financial statements and the use of bond proceeds.

Firm performance can provide additional insights on whether the expansion of domestic bond markets in East Asia was supply or demand driven. Smaller firms typically have access to a limited number of (mainly domestic) debt markets and are more financially constrained than larger firms.

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Thus, if the supply-side of financing drove the rise in domestic bond issuances, we expect that the relatively smaller new issuers would have increased their leverage more than the larger firms already issuing bonds, which typically have adequate access to funds through multiple domestic and international debt markets (Faulkender and Petersen, 2006; Leary, 2009). Moreover, if the supply of financing accelerated faster than the demand, we would expect that firms hoarded large shares of the bond proceeds in cash and that the share of cash savings per bond issuance was higher during 200816 than in previous periods (Erel et al., 2012; Bruno and Shin, 2017; Acharya et al., 2020). Under the alternative hypothesis that increasing firms’ demand for capital was more important, we would expect that firms invested or spent most of the bond proceeds raised. By studying financial ratios and other key metrics, we can also shed light on the extent to which bond issuers increased their vulnerability. The literature mentioned in the introduction argues that the expansion of bond financing after the GFC increased corporate risks in emerging economies.

To examine firms’ financial statements and the use of bond proceeds during 2008-16, we work with the merged transaction‐level debt issuances and annual balance sheets and income statements for publicly listed firms. In our analysis, new bond issuers are the firms that issued bonds for the first time after 2008. Recurrent bond issuers include firms that issued bonds after 2008 but had already issued bonds before 2008. This type of bond issuers might have behaved differently than the new bond issuers, as they already had access to bond financing and likely were larger firms.<sup>19</sup> Non-issuers are firms that did not issue bonds or equity after 2008. By focusing on publicly listed firms, the sample of bond issuers is reduced to a fraction of firms, as only 38 percent of bond issuers in our data are publicly listed firms. These firms tend to be larger than non-listed firms and, thus, might have fewer unrealized investments opportunities than non-listed bond issuers.

> 19 As of 2016, the number of new East Asian firms tapping bond markets surpassed that of recurrent issuers. Consistent with the patterns shown in Section 3, new bond issuers were about half as large (in terms of assets) as recurrent issuers and they mostly used domestic markets to obtain bond financing (Appendix Figure 3).

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We examine the following key financial statement variables and performance ratios: total assets, total debt, leverage (debt over assets), cash, capital expenditures (CAPEX), earnings before interest and depreciation (EBITDA), interest expenses, ICR, and ROE. ICR and ROE are measures of firm performance. ICR shows how easily a firm can pay debt interest expenses through internal sources of finance by calculating the ratio of EBITDA to interest expenses. ROE measures the ratio of net earnings to shareholders’ equity. A decline in ICR and/or ROE signal a deterioration in the financial performance and increased solvency risks.

The three groups of firms followed similar trends before 2008, but their behavior differed after 2008 (Figure 7). Although debt outstanding substantially increased after 2008 for both new and recurrent bond issuers (consistent with the rise in bond issuances), the increase in debt was substantially larger for new bond issuers. For the median new issuer total debt in 2016 was 4.8 times the average value of debt in 2000-07, whereas total debt was 2.7 times higher in 2016 than in 2000-07 for the median recurrent issuer. Moreover, new bond issuers accumulated assets at a slower rate than debt, increasing their (debt over assets) leverage ratio. The median leverage ratio for these firms was 22 percent higher in 2016 than in 2000-07. This pattern contrasts with that of recurrent issuers for which debt and assets expanded at a similar pace, keeping their leverage ratio stable over time.<sup>20</sup> Although new issuers seem to have used part of the new debt to conduct some investments, they also accumulated a substantial amount of cash after 2008. In 2016 the median new issuer had cash holdings that were 2.9 times the average holdings in 2000-07. In turn, CAPEX was 1.5 times larger in 2016 relative to 2000-07 for the median new issuer. Relative to recurrent issuers, new issuers accumulated more cash whereas the growth in CAPEX was similar for both types of firms.

According to ICR and ROE, declining financial performance was characteristic of new issuers. These firms exhibited worse financial performance than recurrent issuers. ICR declined after 2008 for

> 20 These patterns also hold if leverage is calculated as debt over equity.

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new bond issuers, whereas it tended to increase for recurrent issuers. ROE declined for both groups of firms after 2008, but the fall was largest among the new issuers. Even though new issuers faced cheaper financing in bond markets, these patterns could imply that the large cash holdings yielded relatively lower returns. It might also be the case that the financing directed to new investments was geared toward projects with relatively low rates of return.

To formally assess changes in the financial statement characteristics of East Asian firms after 2008, we run a difference-in-difference regression approach. For each of the financial statement variables we estimate the following regression specification: The dependent variable _Yit_ is each of the financial statement variables described above for each firm _i_ and period _t_ . All variables are averaged within two periods: 2008-16 and 2000-07.<sup>21</sup> The independent variable _post_ is a dummy that equals one for the 2008-16 period and zero for the 2000-07 period, _D recurrenti_ is a dummy variable that equals one if a firm is a recurrent bond issuer and zero otherwise, and _Dinew_ is a dummy variable that equals one if a firm is a new bond issuer and zero otherwise. _β_ 1 measures the change in each variable for non-issuers during 2008-16 relative to 2000-07, whereas _β2_ and _β3_ measure the differential effect for recurrent issuers and new bond issuers relative to non-issuers, respectively. _αi_ denotes firm fixed effects.

The regression results confirm that debt accumulation after 2008 was significantly larger for new bond issuers than for recurrent bond issuers and non-issuers (Table 6). Consistent with the earlier patterns, leverage of new bond issuers grew faster than for recurrent issuers during 2008-16, while their cash holdings increased substantially and relatively more than CAPEX. Results also show that

> 21 By collapsing time series data into periods, our standard errors are robust to concerns of autocorrelation (Bertrand et al., 2004; Khwaja and Mian, 2008).

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the financial indicators of new issuers deteriorated relative more than those of other firms. The ICR of new issuers deteriorated relative to the ICR of non-issuers, whereas the ROE of new issuers deteriorated not only relative to the ROE of non-issuers but also relative to the ROE of recurrent issuers. The regression results are very similar when excluding China (Appendix Table 3).

We now proceed to study more systematically how East Asian issuers used the funds raised after 2008, following the methodology pioneered by Kim and Weisbach (2008).<sup>22</sup> We focus on the changes in five key accounting variables that potentially capture the use of the proceeds raised through bond issuances. For each bond issuer, we estimate changes in CAPEX, acquisitions, R&D, inventory, and cash holdings. This methodology allows us to directly link the proceeds from bond issuances to the subsequent firms’ investment measures. We employ the following specification for each of the five measures of possible use of bond issuances during 2008-16: where Y = ln[(( _Vt – V0_ )⁄ _assets0_ ) + 1] corresponds to balance sheet variables ( _V = inventory_ and _cash_ ), and Y = ln[(∑ _ti_ =1 _Vi_ ⁄ _assets0_ ) + 1] to income and cash flow variables ( _V = CAPEX_ , _acquisitions_ , and _R&D_ ). _Other sources_ = ln[(∑ti=1 ( ( _total sourcesi – issuance_ )⁄ _assets0_ ) + 1], where total sources represent the total funds generated by the firm internally and externally. Year 0 is the year just prior to the bond issuance and year _t_ = 1, 2, 3 denotes de number of years after year 0. In the specification, _α_ c and _αt_ denote economy and time fixed effects, respectively. To simplify notation, we omit all the other subscripts from Equation (2). We present separate estimates for the new bond issuers and recurrent bond issuers. The estimations are panel regressions conducted at the firm level during 2008-16. The coefficient _β1_ measures the proportion of proceeds raised per issuance used to increase each of the

> 22 Erel et al. (2012) and Calomiris et at. (2019) use the same methodology to estimate the use of funds of international bond issuances by emerging market firms during the post-GFC period.

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possible uses of funds (CAPEX, acquisitions, R&D, inventory, and cash). We report the estimated elasticities and the dollar effects for the median firm in the median economy.<sup>23</sup> The results show that the most important use of funds (the largest _β_ 1 coefficient) per bond issuance after 2008 was cash holdings (Table 7).<sup>24</sup> Estimation of the dollar effects indicate that new and recurrent bond issuers held in cash around 40 cents for every dollar raised in the issuance year. Two years later, new bond issuers still held in cash 30 cents per dollar raised, whereas the additional amount held in cash by recurrent bond issuers was not statistically different from zero in the first year after the issuance. Aside from cash, the main uses of bond proceeds in the first year after issuance were CAPEX (11 cents for new issuers and 17 cents for recurrent issuers per dollar raised) and inventory (8 cents for new issuers and 11 cents for recurrent issuers per dollar raised).

Given the large cash coefficient per bond raised during 2008-16, we study next whether the high coefficient of cash accumulation was specific to this period (which exhibited a fast acceleration in bond issuances) or whether it was also observed in previous years. To do so, we exploit the time series dimension of the data by running the same regression in Equation 2 for each year before and after 2008. The cash accumulation coefficients ( _β1_ ) estimated from the regressions show that firms in East Asia saved a significantly larger proportion of bond proceeds in cash during 2008-16 than during previous years, when cash accumulation from bond proceeds was typically close to zero (Figure 8). In 2001-07, the only year that records higher levels of cash accumulation per bond issuance was 2007, just before the GFC.

> 23 To calculate the dollar effects, we first predict the use of proceeds using the corresponding bond issuance observations and the estimated coefficient from the regression result of Equation (2). As fixed effects, we use the coefficients for each economy and year of the corresponding economy-year pair. We then calculate the predicted values of the dependent variables again after adding one U.S. dollar to the issuance value. Next, we calculate the difference of the two predicted values to obtain the change in the use of proceeds due to one U.S. dollar increase in issuance. Lastly, we compute the average difference per firm. For each economy, we then take the average difference for the median firm and report the value for the median economy.

> 24 We omit the _β2_ coefficients on other sources of capital from Table 7 to save space as we use this variable as a control.

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# **6. Conclusions**

This paper shows that, although international bond markets were an important contributor to the corporate financing boom in East Asia during the 1990s, domestic markets have played an even more important role in the new millennium, especially since 2008. As the amount raised domestically grew faster than that raised internationally, the share of domestic currency debt increased, the number of firms issuing in domestic markets expanded, the size of issuing firms declined, and domestic markets became the predominant place where bonds were issued.

The paper also sheds light on the forces behind the acceleration in domestic bond financing in East Asia. Our findings suggest that a supply-side expansion by domestic investors that lowered the cost of capital in domestic bond markets was a key factor behind the rise in domestic bond financing. Backing this hypothesis, we find that (i) since 2008 new (relatively smaller) firms started to issue domestic bonds for the first time; (ii) the rise in domestic issuance occurred while bond yields substantially declined (financing costs dropped); (iii) the new issuers increased leverage relatively faster than recurrent issuers, while keeping a substantial share of the bond proceeds raised in cash; and (iv) the proportion of cash savings per bond issuance was larger during 2008-16 than in the previous period. We also find that domestic investors were the main providers of liquidity for domestic bond markets after 2008.

Our evidence implies that to comprehensively understand the trends in capital market financing by emerging market firms, domestic markets cannot be overlooked. Our results are consistent with the notion that domestic and international markets are segmented and might complement each other by servicing different types of firms, even with no or few restrictions to crossborder investments. Compared to international markets, domestic bond markets exhibit substantial differences in terms of issuance activity, currency denomination, and size of issuing firms. This finding might be related to the fact that foreign and domestic investors tend to buy securities issued in their 25
own markets, offering different types of financing to different firms. Thus, focusing only on the amount of debt issued abroad might miss a significant portion of the total value of corporate debt and inaccurately assess its composition in terms of investors, terms of financing, and borrowers. Bringing domestic issuances into the analysis can help measure corporate vulnerabilities and exposures to different shocks more adequately.

Even though the issuance activity in East Asia is large enough to have implications for the aggregate financing patterns of emerging economies, <mark>the region seems to be an exception in the emerging world. Outside East Asia, the relative importance and growth of domestic bond issuances was much lower. Different factors could explain the uniqueness of East Asia. The growth of East Asian domestic bond markets could be traced back to the AFC, after which policy makers implemented a series of reforms to reduce dependence on foreign financing (Mizen and Tsoukas, 2014; Bose et al., 2019). Stronger fiscal discipline by East Asian governments could have been another reason behind the expansion in financing for the corporate sector since the GFC. Specifically, relatively stronger fiscal positions</mark> by governments could have reduced <mark>crowding out and, as a result, increased financing toward the corporate sector. The growth in savings experienced by East Asian economies since the early 2000s could have played a role as well. As households became richer, they might have increased their savings and investments in financial products. Higher demand for investment products, coupled with a home bias, could have increased the flow of funds toward domestic bond markets through domestic institutional investors. The “great retrenchment” in international capital flows after the GFC could have also contributed to these developments, at least in the immediate years following the crisis when investors worldwide became more risk averse and reduced their share of foreign assets (Milesi-Ferretti and Tille, 2011).</mark> 26