https://www.nber.org/system/files/working_papers/w11370/w11370.pdf

What Matters for Financial Development? Capital Controls, Institutions, and Interactions

Testing Trade-Off and Pecking Order Predictions about Dividends and Debt

Despite the dramatic reduction in explicit barriers to international investment activity over the last 60 years, the impact of financial globalization has been surprisingly limited. I argue that country attributes are still critical to financial decision-making because of “twin agency problems” that arise because rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors. When these twin agency problems are significant, diffuse ownership is inefficient and corporate insiders must co-invest with other investors, retaining substantial equity. The resulting ownership concentration limits economic growth, financial development, and the ability of a country to take advantage of financial globalization.

/pdf/the-limits-of-financial-globalization-47c50tv6dv.pdf

The Limits of Financial Globalization

Writings on the macroeconomic impact of capital account liberalization find few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. The lion's share of papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory, because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

/pdf/capital-account-liberalization-theory-evidence-and-1si19w3fvc.pdf

Capital Account Liberalization: Theory, Evidence, and Speculation

Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. Most papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

/pdf/capital-account-liberalization-theory-evidence-and-n6n9x9huwp.pdf

Capital Account Liberalization: Theory, Evidence and Speculation

This paper examines the stock price impact of terrorist attacks. Using an official list of terrorism-related incidents compiled by the Counterterrorism Office of the U.S. Department of State, we identify 75 attacks between 1995 and 2002 in which publicly traded firms are targets. An event-study analysis around the day of the attacks uncovers evidence of a statistically significant negative stock price reaction of -0.83%, which corresponds to an average loss per firm per attack of $401 million in firm market capitalization. A cross sectional analysis of the abnormal returns indicates that the impact of terrorist attacks differs according to the home country of the target firm and the country in which the incident occurred. Attacks in countries that are wealthier and more democratic are associated with larger negative share price reactions. Most interestingly, we find that human capital losses, such as kidnappings of company executives, are associated with larger negative stock price reactions than physical losses, such as bombings of facilities or buildings. We discuss the implications of these findings for existing research on terrorism and for current policy debates regarding terrorism re-insurance programs.

Terrorism and the Stock Market

Though prior capital structure literature suggests a causal relation between liquidity and leverage (i.e., liquidity affects leverage), we explore the notion that these variables are jointly determined. Consistent with the idea that debt forces managers to make better investment decisions, we find that as leverage increases, spreads decrease. Results from our empirical analysis further imply that as liquidity decreases, leverage increases, which is consistent with the notion that managers rely on debt financing when equity financing becomes relatively expensive. While controlling for the endogenous relationship between spreads and leverage greatly reduces the impact of spreads on leverage, results from our method suggest that a one standard deviation increase in spreads results in a 3% increase in leverage. Not only do our results add to the understanding of the complex relationship between capital structure and liquidity, they also shed light on the determinants of leverage and bid-ask spreads.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID880421_code392647.pdf?abstractid=880421&mirid=1&type=2

On Capital Structure and the Liquidity of a Firm's Stock

Equity market liberalizations are like IPOs, but they are IPOs of a country's stock market rather than of individual firms. Both are endogenous events whose benefits are limited by poor investor protection, agency costs, and information asymmetries. As for stock prices following an IPO, there are legitimate concerns about the efficiency in the period following the liberalization of the stock market returns of countries that liberalize their equity markets. Equity markets of liberalizing countries experience extremely strong performance immediately after the liberalization, but then go through a period of poor performance. This pattern of stock returns is more dramatic for countries with poorer financial development before the liberalization.

/pdf/equity-market-liberalizations-as-country-ipo-s-4wna384775.pdf

Equity-Market Liberalizations as Country IPO's

In this paper, I study the determinants of credit spread changes of individual U.S. dollar denominated bonds - domestic and foreign sovereign - using fundamentals specified by structural models. Credit spreads are important determinants of the cost of debt for all issuers and are fully determined by credit risk in structural models. I construct a new dataset of domestic corporate and sovereign U.S. dollar bonds, which I use to find that changes in spreads not explained by fundamentals have two large common components that are distinct for each type of debt I study. Using a vector autoregressive (VAR) model, I find that domestic spreads are related to the lagged first component of sovereign spreads. Consequently, even though there is no contemporaneous common component in bond spreads, there seems to be a common component when focusing on the dynamics of these spreads. Traditional macro liquidity variables are related to the common components found in domestic and sovereign spread changes. My findings suggest possible explanations for the common component documented by previous research in domestic debt spreads. My research shows that, after taking into account the dynamics of the common components in credit spreads across debt types, the cost of debt for firms and countries depends to some extent on shocks that affect all types of debt.

Rodolfo Martell

Papers

Terrorism and the Stock Market

Terrorism and the Stock Market

On Capital Structure and the Liquidity of a Firm's Stock

Equity-Market Liberalizations as Country IPO's

Understanding Common Factors in Domestic and International Bond Spreads