Using firm-level data from Chinese Industry Census and loan data from the China Development Bank (CDB), we document two essential mechanisms underlying CDB credit positive spillovers across the supply chain. First, CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces the downstream firms’ costs of goods. Second, CDB loans to upstream industries lead to increased accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to identify exogenous variations of CDB credit.
{"title":"The Supply Chain Channel of Government Credit Pass-through","authors":"Hong Ru, Endong Yang","doi":"10.2139/ssrn.3324019","DOIUrl":"https://doi.org/10.2139/ssrn.3324019","url":null,"abstract":"Using firm-level data from Chinese Industry Census and loan data from the China Development Bank (CDB), we document two essential mechanisms underlying CDB credit positive spillovers across the supply chain. First, CDB loans to upstream industries significantly lower the prices of intermediate goods sold by upstream firms, which, in turn, reduces the downstream firms’ costs of goods. Second, CDB loans to upstream industries lead to increased accounts receivable of upstream firms and accounts payable of downstream firms. To identify these positive spillover effects, we use predetermined local politician turnover cycles as instrumental variables to identify exogenous variations of CDB credit.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"20 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"78752820","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I characterize the global solution to the portfolio problem of two heterogeneous investors with general preferences, in a two-tree, two-good environment. Investors have recursive preferences and a bias in consumption towards a preferred good. The framework highlights the role of the allocation of wealth across investors for portfolios, asset prices, and risk sharing, an aspect that had received little emphasis in such a setting. The influence of the allocation of wealth grows especially as markets become imperfectly integrated, and as investor heterogeneity rises -- be it through a larger bias in consumption, the introduction of labor income, or asymmetries in preferences -- to the point where it can match or surpass the impact of fundamentals. The framework lends itself to several applications and extensions, e.g. in international or environmental contexts.
{"title":"Two Investors, Two Trees, Two Goods","authors":"Maxime Sauzet","doi":"10.2139/ssrn.3898027","DOIUrl":"https://doi.org/10.2139/ssrn.3898027","url":null,"abstract":"I characterize the global solution to the portfolio problem of two heterogeneous investors with general preferences, in a two-tree, two-good environment. Investors have recursive preferences and a bias in consumption towards a preferred good. The framework highlights the role of the allocation of wealth across investors for portfolios, asset prices, and risk sharing, an aspect that had received little emphasis in such a setting. The influence of the allocation of wealth grows especially as markets become imperfectly integrated, and as investor heterogeneity rises -- be it through a larger bias in consumption, the introduction of labor income, or asymmetries in preferences -- to the point where it can match or surpass the impact of fundamentals. The framework lends itself to several applications and extensions, e.g. in international or environmental contexts.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"49 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"75023651","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Should monetary policy rule stabilize the exchange rate? In contrast to the conclusion from the optimal open-economy monetary policy literature, this papers show analytically, in a standard two-country new Keynesian model, that under monetary shocks and UIP shocks, stabilizing exchange rate in addition to standard inflation targeting can be welfare-improving. Thus, desirability of exchange rate stabilization critically depends on the relative magnitude of nominal and financial shocks, compared with those of demand shocks. Our quantitative analysis shows that exchange rate stabilization improves welfare at low values of exchange rate targeting strength, but too strong a response reverses the effect. The potential welfare gain from optimal exchange rate stabilization is sizable, but international cooperation in the sense of mutual willingness to stabilize the exchange rate is required to fully reap the gain.
{"title":"The Role of Exchange Rate in Monetary Policy Rules: A Welfare-Based Re-Examination","authors":"Jiao Shi","doi":"10.2139/ssrn.3943734","DOIUrl":"https://doi.org/10.2139/ssrn.3943734","url":null,"abstract":"Should monetary policy rule stabilize the exchange rate? In contrast to the conclusion from the optimal open-economy monetary policy literature, this papers show analytically, in a standard two-country new Keynesian model, that under monetary shocks and UIP shocks, stabilizing exchange rate in addition to standard inflation targeting can be welfare-improving. Thus, desirability of exchange rate stabilization critically depends on the relative magnitude of nominal and financial shocks, compared with those of demand shocks. Our quantitative analysis shows that exchange rate stabilization improves welfare at low values of exchange rate targeting strength, but too strong a response reverses the effect. The potential welfare gain from optimal exchange rate stabilization is sizable, but international cooperation in the sense of mutual willingness to stabilize the exchange rate is required to fully reap the gain.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"22 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76025978","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this study, we investigate how governance quality determines the lending behavior of foreign-owned banks in emerging host markets. We do this by employing a dataset that includes foreign banks from 45 developed markets operating in 58 emerging markets. We incorporate direct measures of governance quality as well as home–host country distance in governance quality. Additionally, we investigate foreign banks’ lending behavior during the 2008-2009 financial crisis (GFC). We document that more micro-oriented governance dimensions, such as business regulatory quality and corruption control, play a role for foreign banks. Furthermore, we show that home–host distance in governance quality shapes lending behaviors to a greater extent than the quality in host markets itself. We also show that governance quality proximity between home and host markets fostered emerging economies’ resilience during the GFC to a greater extent than quality as a standalone.
{"title":"Home–Host Distance in Governance Quality, Foreign Banks’ Lending, and Emerging Host Markets’ Resilience","authors":"Oskar Kowalewski, Paweł Pisany","doi":"10.2139/ssrn.3943270","DOIUrl":"https://doi.org/10.2139/ssrn.3943270","url":null,"abstract":"In this study, we investigate how governance quality determines the lending behavior of foreign-owned banks in emerging host markets. We do this by employing a dataset that includes foreign banks from 45 developed markets operating in 58 emerging markets. We incorporate direct measures of governance quality as well as home–host country distance in governance quality. Additionally, we investigate foreign banks’ lending behavior during the 2008-2009 financial crisis (GFC). We document that more micro-oriented governance dimensions, such as business regulatory quality and corruption control, play a role for foreign banks. Furthermore, we show that home–host distance in governance quality shapes lending behaviors to a greater extent than the quality in host markets itself. We also show that governance quality proximity between home and host markets fostered emerging economies’ resilience during the GFC to a greater extent than quality as a standalone.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"36 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"90454106","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In a sample of 7,209 environmental, social, and governance (ESG) incidents involving 63 incident countries and more than 6,000 firms, we show that abnormal event returns are negative (-0.6%) on average but less so when incidents occur abroad rather than at home. This domestic-foreign return gap is less pronounced when incidents are caused by firms (i) with a large shareholder base from the incident country or (ii) headquartered in more environmentally friendly countries. The gap is accentuated when culprits are headquartered in more patriotic countries. Taken together, our results suggest that shareholder preferences for ESG externalities are not universal but characterized by home bias.
{"title":"The ESG Home Bias","authors":"Moqi Groen-Xu, Stefan Zeume","doi":"10.2139/ssrn.3938925","DOIUrl":"https://doi.org/10.2139/ssrn.3938925","url":null,"abstract":"In a sample of 7,209 environmental, social, and governance (ESG) incidents involving 63 incident countries and more than 6,000 firms, we show that abnormal event returns are negative (-0.6%) on average but less so when incidents occur abroad rather than at home. This domestic-foreign return gap is less pronounced when incidents are caused by firms (i) with a large shareholder base from the incident country or (ii) headquartered in more environmentally friendly countries. The gap is accentuated when culprits are headquartered in more patriotic countries. Taken together, our results suggest that shareholder preferences for ESG externalities are not universal but characterized by home bias.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"7 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-10-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"73140303","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We distinguish the valuation effects of growth opportunities and profits through a common lens, namely, corporate free cashflows (FCF) whose negative value means investments using external funds while positive value means internal funds available for payouts. The sign of FCF’s cross-sectional relation to firm value in a country (FCF beta) can show which one has a greater impact on country-wide corporate valuations. Using data from 43 countries for the period of 1992-2018, we show that firm values are higher in countries whose FCF beta is more negative—i.e., where externally funded corporate investments, not internally available corporate profits, are valued higher. The role of growth opportunities in country-wide valuations is more pronounced among growth firms. In contrast, mature firms are representative of the valuation of the global industry to which they belong, not their country. Finally, the FCF beta is more negative in common law countries than in civil law countries, suggesting that growth-supporting governance is more value-relevant than payout-securing governance at least at the country level.
{"title":"What Explains Cross-Country Difference in Corporate Valuations? Growth Opportunities or Profitability?","authors":"Dong Wook Lee, Lingxia Sun","doi":"10.2139/ssrn.3902731","DOIUrl":"https://doi.org/10.2139/ssrn.3902731","url":null,"abstract":"We distinguish the valuation effects of growth opportunities and profits through a common lens, namely, corporate free cashflows (FCF) whose negative value means investments using external funds while positive value means internal funds available for payouts. The sign of FCF’s cross-sectional relation to firm value in a country (FCF beta) can show which one has a greater impact on country-wide corporate valuations. Using data from 43 countries for the period of 1992-2018, we show that firm values are higher in countries whose FCF beta is more negative—i.e., where externally funded corporate investments, not internally available corporate profits, are valued higher. The role of growth opportunities in country-wide valuations is more pronounced among growth firms. In contrast, mature firms are representative of the valuation of the global industry to which they belong, not their country. Finally, the FCF beta is more negative in common law countries than in civil law countries, suggesting that growth-supporting governance is more value-relevant than payout-securing governance at least at the country level.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"54 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"84383997","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The financial press linked Trump‘s political rhetoric to the depreciation of the Mexican peso. The massive trade volume of the peso/dollar currency pair obliges to investigate whether Trump‘s presidential campaign and regime, through uncertainty, cause fluctuations in the currency pair. This study finds that economic policy uncertainty (EPU) does not Granger cause the changes in the peso. However, a shock to the EPU produces a short-lived, statistically insignificant variation in the exchange rate. Also, EPU does not have a significant effect on the exchange rate beyond the first moment. EPU‘s lack of focus on trade, a central economic link between the US and Mexico, is a plausible reason for the result. The absence of an effect of EPU on the peso prevents any policy measure.
{"title":"Shock Thy Neighbor : Economic Uncertainty and Exchange Rate","authors":"Vaibhav Keshav","doi":"10.2139/ssrn.3925706","DOIUrl":"https://doi.org/10.2139/ssrn.3925706","url":null,"abstract":"The financial press linked Trump‘s political rhetoric to the depreciation of the Mexican peso. The massive trade volume of the peso/dollar currency pair obliges to investigate whether Trump‘s presidential campaign and regime, through uncertainty, cause fluctuations in the currency pair. This study finds that economic policy uncertainty (EPU) does not Granger cause the changes in the peso. However, a shock to the EPU produces a short-lived, statistically insignificant variation in the exchange rate. Also, EPU does not have a significant effect on the exchange rate beyond the first moment. EPU‘s lack of focus on trade, a central economic link between the US and Mexico, is a plausible reason for the result. The absence of an effect of EPU on the peso prevents any policy measure.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"40 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79541894","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Franklin Allen, Xian Gu, C. W. Li, Jun Qian, Yiming Qian
A central feature of China’s shadow banking sector is the prevalence of implicit guarantees that investors come to expect for returns on risky investments. We develop a theoretical model and argue that project screening by financial intermediaries such as trust companies, accompanied by their implicit guarantees on project payoffs, can be the second best arrangement in funding risky projects. Using a comprehensive set of investment products sponsored by all the licensed trust companies, we document evidence consistent with the model’s predictions about the ex ante pricing of the products and ex post recourse in case of defaults on the products. In particular, initial yields of the products not only reflect borrower risks, but also reflect the strength of implicit guarantees, including the characteristics of the issuing company and its controlling shareholder, and whether the product is sold through a large bank. In addition, the spread-to-risk sensitivity is flattened by strong guarantees.
{"title":"Implicit Guarantees and the Rise of Shadow Banking: The Case of Trust Products","authors":"Franklin Allen, Xian Gu, C. W. Li, Jun Qian, Yiming Qian","doi":"10.2139/ssrn.3924888","DOIUrl":"https://doi.org/10.2139/ssrn.3924888","url":null,"abstract":"A central feature of China’s shadow banking sector is the prevalence of implicit guarantees that investors come to expect for returns on risky investments. We develop a theoretical model and argue that project screening by financial intermediaries such as trust companies, accompanied by their implicit guarantees on project payoffs, can be the second best arrangement in funding risky projects. Using a comprehensive set of investment products sponsored by all the licensed trust companies, we document evidence consistent with the model’s predictions about the ex ante pricing of the products and ex post recourse in case of defaults on the products. In particular, initial yields of the products not only reflect borrower risks, but also reflect the strength of implicit guarantees, including the characteristics of the issuing company and its controlling shareholder, and whether the product is sold through a large bank. In addition, the spread-to-risk sensitivity is flattened by strong guarantees.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"77 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82299051","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Economic agents pursue government funds using political connections, but it is sometimes unclear which types of connections and whose connections matter, and which agents have opportunities to benefit. We address these issues for the over one-half-trillion-dollar Paycheck Protection Program (PPP). Partisan political connections appear influential only for banks, nonpartisan connections work only for small businesses. Banks, rather than small businesses, had direct opportunities to apply for PPP funds. Banks benefited from higher profitability due to increased lending and competitive advantages, while existing research finds small businesses benefited. Thus, PPP bailed out both banks and small businesses, but through different connections.
{"title":"Whose Bailout Is It Anyway? Political Connections of Small Businesses vs. Banks in PPP Bailouts","authors":"Allen N. Berger, M. Karakaplan, Raluca A. Roman","doi":"10.2139/ssrn.3920758","DOIUrl":"https://doi.org/10.2139/ssrn.3920758","url":null,"abstract":"Economic agents pursue government funds using political connections, but it is sometimes unclear which types of connections and whose connections matter, and which agents have opportunities to benefit. We address these issues for the over one-half-trillion-dollar Paycheck Protection Program (PPP). Partisan political connections appear influential only for banks, nonpartisan connections work only for small businesses. Banks, rather than small businesses, had direct opportunities to apply for PPP funds. Banks benefited from higher profitability due to increased lending and competitive advantages, while existing research finds small businesses benefited. Thus, PPP bailed out both banks and small businesses, but through different connections.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"255 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"74532784","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Elisabeth Kempf, Mancy Luo, Larissa Schäfer, Margarita Tsoutsoura
Does partisan perception shape the flow of international capital? We provide evidence from two settings, syndicated corporate loans and equity mutual funds, to show that ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Moreover, we find that ideological alignment with foreign countries also affects investments of non-U.S. investors and can explain patterns in bilateral FDI flows. Our empirical strategy ensures that direct economic effects of foreign elections or bilateral ties between countries are not driving the result. Combined, our findings imply that partisan perception is a global phenomenon and its economic effects transcend national borders.
{"title":"Does Political Partisanship Cross Borders? Evidence from International Capital Flows","authors":"Elisabeth Kempf, Mancy Luo, Larissa Schäfer, Margarita Tsoutsoura","doi":"10.2139/ssrn.3904077","DOIUrl":"https://doi.org/10.2139/ssrn.3904077","url":null,"abstract":"Does partisan perception shape the flow of international capital? We provide evidence from two settings, syndicated corporate loans and equity mutual funds, to show that ideological alignment with foreign governments affects the cross-border capital allocation by U.S. institutional investors. Moreover, we find that ideological alignment with foreign countries also affects investments of non-U.S. investors and can explain patterns in bilateral FDI flows. Our empirical strategy ensures that direct economic effects of foreign elections or bilateral ties between countries are not driving the result. Combined, our findings imply that partisan perception is a global phenomenon and its economic effects transcend national borders.","PeriodicalId":13701,"journal":{"name":"International Corporate Finance eJournal","volume":"119 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2021-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"80354953","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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