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

Exchange rate risk management : evidence from East Asia

The recent East Asian financial crisis provides a natural experiment for investigating foreign exchange risk management by nonfinancial corporations. During this period, the financial crisis exposed local firms to large depreciations in exchange rates and reduced access to foreign capital. The authors explore the exchange rate hedging practices of firms that hedged exposure to foreign debt in eight East Asian countries between 1996 and 1998. They identify and characterize East Asian companies that used foreign currency derivatives, documenting differences in size, financial characteristics, and exposure to domestic and foreign debt. They investigate the factors improtant in the use of foreign currency derivatives. Unlike studies of US firms, they find limited support for existing theories of optimal hedging. Instead, they find that firms use foreign earnings as a substitute for hedging with derivatives. And they find evidence that firms engage in"selective"hedging. They investigate the relative performance of hedgers during and after the crisis. They find no evidence that East Asian firms eliminated their foreign exchange exposure by using derivatives. Firms that used derivatives before the crisis performed just as poorly as nonhedgers during the crisis. After the crisis, firms that hedged performed somewhat better than nonhedgers, but this result appears to be explained by a larger post-crisis currency exposure for hedgers (an exchange rate risk premium), which had limited access to derivatives during this period.Payment Systems&Infrastructure,Financial Intermediation,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies,Strategic Debt Management,Financial Intermediation

Corporate financial policies and performance around currency crises

Using data from 17 countries that have suffered a currency crisis, this paper studies firm-level leverage and performance measures before and after a crisis has occurred. We show that in the years preceding a currency crisis, companies that are expected to benefit from currency depreciations increase their leverage more than companies that are expected to be harmed by currency depreciations. The evidence regarding the profitability and financial fragility ratios is consistent with the leverage results, since companies that are expected to benefit from depreciations fare worse than other companies before a crisis. We also provide evidence that the Asian crisis is different from the previous European and Latin American ones: in Asia firms become more fragile after the crisis and their profitability declines and leverage increases further, whereas in Europe and Latin America there are clear signs of recovery after a crisis has occurred, especially for firms that are ex-ante expected to benefit from depreciations

Empirical Determinants and Patterns of Research and Development Investment in Asia

This paper investigates the financial determinants of research and development (R&D) investment in Asia, where innovation is naturally seen as the key driver of future (high) economic growth. We sample listed nonfinancial firms from eight economies in region (the People's Republic of China; Hong Kong, China; India; Indonesia; the Republic of Korea; Malaysia; the Philippines; and Singapore) for the period 2002–2011 using the Oriana database. Panel data regressions show sensitivity of R&D investment to changes in cash flow, indicating reliance on internal financing of R&D and financially constrained firms, and a greater role of debt, rather than equity, as a source of external financing. In terms of alternative uses of funds, dividend payments by firms seem to divert from their spending on R&D, but investments in financial assets do not. In terms of ownership structure, empirical results show that both higher domestic ownership concentration and higher foreign ownership tend to lower cash flow sensitivity of R&D investment, suggesting more stable funding of innovation. Overall, there does not seem to be an extreme preference of firm shareholders for short-term returns at the expense of long-term productivity. However, there is clearly a gain for firms as well as economies they are in with better access to external financing of R&D

Exchange rate exposure, hedging and the use of foreign currency derivatives

1 We are very grateful to Kumar Visvanathan for graciously sharing the data on foreign currency derivatives. We also greatly appreciate comments received by Yakov Amihud, Pierluigi Balduzzi

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