Legal effectiveness and external capital : the role of foreign debt

Previous research has documented weak, and sometimes conflicting, effects of legal quality on measures of firm debt. Using WorldScope data for 1,689 firms, as well as more detailed proprietary data for 315 firms across nine East Asian countries, the authors find that access to foreign financing appears to loosen borrowing constraints associated with poor legal systems. This helps resolve inconsistencies in prior findings and explains how legal protection is important for borrowing by firms. In particular, they find that legal effectiveness is important for determining the amount, maturity, and currency denomination of debt. The authors discuss several mechanisms by which firms can avoid the costs of poor legal systems with foreign borrowing. The paper contributes to the policy debate surrounding the importance of creditor rights for domestic lending.Municipal Financial Management,Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Environmental Economics&Policies

The effect of markups on the exchange rate exposure of stock returns

This paper examines how to properly specify and test for factors that affect the exchange-rate exposure of stock returns. We develop a theoretical model, which explicitly identifies three channels of exposure. An industry's exposure increases (1) by greater competitiveness in the market where its final output is sold, (2) the interaction of greater competitiveness in its export market and a larger share of exports in production and, (3) the interaction of less competitiveness in its imported input market and the smaller the share of imports in production. Using a sample of 82 U.S. manufacturing industries at the 4-digit SIC level, classified in 18 2-digit industry groups, between 1979 and 1995, we estimate exchange-rate exposure as suggested by our model. We find that 4 out of 18 industry groups are significantly exposed to exchange-rate movements through at least one channel of exposure. On average, a 1 percent appreciation of the dollar decreases the return of the average industry by 0.13 percent. Consistent with our model's predictions, as an industry's markups fall (rise), its exchange-rate exposure increases (decreases).Stock - Prices ; Foreign exchange rates ; Econometric models

The Use of Foreign Currancy Derivatives, Corporate Governance, and Firm Value Around the World

This paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty-nine countries with significant exchange-rate exposure. Derivatives can be used for managers’ self-interest, for hedging or for speculative purposes. We hypothesize that investors can appeal to a firm’s internal (firm-level) and external (country-level) corporate governance to draw inferences on a firm’s motive behind the use of derivatives, since well-governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers’ self-interest. Consistent with this explanation, we find strong evidence that the use of currency derivatives for firms that have strong internal firm-level or external country-level governance is associated with a significant value premium