Does the FED's QE Program Alleviate Firmss Financial Constraints in Emerging Economies?

Abstract

This paper investigates whether the Quantitative Easing (QE) program implemented by the Federal Reserve Board after the 2007-2008 global financial crisis affects firms in emerging economies by improving their access to external financing. Our hypothesis relies on the idea that the excess of liquidity induced by the QE program in the aftermath of the crisis motivates global investors to reallocate their funds to emerging markets in search of higher expected returns. Consequently, more funds are available for local firms, thus alleviating their financial constraints. We empirically test this hypothesis using a sample of 1,000 nonfinancial firms in 12 emerging economies for the period from 2000 to 2014 from the Compustat Global database. By measuring the extent of firms’ financial constraint with Fazzari et al.’s (1988) investment-cash flow sensitivity coefficient, we find support for our hypothesis only in the second QE episode where ex-ante financially restricted firms become less sensitive to cash flows. For the first and third analyzed QE episodes, we find the opposite; that is, firms become more financially constrained. The results for the first and third periods are thus consistent with flight-to-quality and tapering mechanisms, respectively. Our evidence resembles prior evidence using capital flows data and highlights the significant role of the QE program on emerging economies.