Abstract
This paper uses issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. It shows that foreign inflows are strongly correlated with country-level issuance. The relation especially reflects the behavior of large firms. To identify supply-side shocks, capital inflows into each country are instrumented with exogenous changes in other countries’ attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented contemporaneous and lagged capital inflows lead large firms to raise new equity, which they use to fund investment.
Highlights
Capital inflows are prevalent in emerging market countries
We study how equity capital inflows affect the economies that receive them by analyzing their connection to equity financing and to real economic activity
Using the same instruments that we employ to gauge the effect of funding supply shocks on issuances, we show that instrumented equity capital inflows predict increases in a variety of potential uses of funds: capital expenditures (CAPEX), corporate acquisitions, research and development expenses (R&D), inventory accumulation, cash and short-term investments, and long-term debt reduction
Summary
Capital inflows are prevalent in emerging market countries. In 2016, foreign investors invested around 64 billion U.S dollars into emerging countries in the form of portfolio equity, i.e., foreign investors’ purchases of stocks of publicly traded emerging market firms. Our paper uses firm-level data to provide the first clear evidence that supply-side shocks to global investors’ interest in emerging market equity produce large increases in new equity issues, which are used in large part to fund investment. We make use of the fact that, for a given amount of capital inflows to emerging markets as a whole, positive shocks to other countries’ attractiveness to foreign investors constitute negative shocks to the subject country’s supply of funds. If demand-side influences are largely common across firms of different sizes, greater issuance responses to capital inflows for large firms likely reflect supply-side differences resulting from differential access to international investors. We believe that all of the various pieces of evidence point toward a supply-driven story, we do not rely only on firm-level differences or lags for identification, but emphasize our instrumenting of equity inflows
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