Financial Shocks and Corporate Investment in Emerging Markets

Abstract

We examine how cross‐firm and cross‐country heterogeneity shapes the responses of corporate investment in emerging markets to changes in U.S. monetary policy and financial‐market volatility, the latter proxying for uncertainty. We find that in response to increases in U.S monetary policy rates or financial‐market volatility, financially weaker firms reduce investment by more than financially strong firms. We also show that firms with stronger balance sheets delay investment voluntarily when faced with higher uncertainty. Finally, we find that stronger macroeconomic fundamentals (lower public debt or higher international reserves) help to buffer corporate investment from increases in U.S. monetary policy rates.

Identifying factors via automatic debiased machine learning

“…By contrast, momentum‐related factors such as prior 6‐month returns (r6), prior 11‐month returns (r11), and short‐term reversal (srev) have insignificant incremental pricing power relative to other factors. These findings are consistent with Li et al (2010) and Cheung et al (2015), confirming the weak momentum effect in China's stock market.…”

U.S. Monetary Policy Shock Spillovers: Evidence from Firm-Level Data

“…The second related strand of literature examines the heterogeneous effects of monetary policy across firm characteristics. The paper most closely related to ours is Li et al (2020), who examine U.S. monetary policy spillovers to emerging market economies using firm-level data. The authors find a role for leverage suggesting, as does our study, the existence of a balance sheet channel of monetary policy.…”

Real Exchange Rates, Economic Complexity, and Investment

“…In fact, the REER_gr coefficient is statistically different from zero for all sub-groups of countries, although the sign varies across these sub-groups. Firms in emerging Asia behave as those in advanced economies, increasing investment when their 15 See Magud and Sosa (2017), Li, Magud, and Valencia (2015), and Love (2004) for evidence on this in emerging market and developing economies, and the references therein for evidence in the U.S.…”

“…The vector of firm-level explanatory variables, , , includes the determinants of corporate investment standard in the literature (see, for example, Magud and Sosa, 2017;and Li, Magud, and Valencia, 2015). Specifically, we use Tobin's q, cash flow, leverage, change in debt, and sales growth.…”