Essays On Risk Biased Exports And Liquidity-Based Determinants Of International Equity Flows
This dissertation is comprised of three essays. Chapter One develops a generalequilibrium framework to address risk-shifting factors in a country allocation of resources between the domestic and export sector. The analytical framework introduces credit frictions as in Allen and Gale (2000) to the general equilibrium model of Helpman and Razin (1978), which features the allocation of factors of production across two sectors of an open economy under uncertainty. The risk bias hinges on the imperfect ability of lenders to monitor the usage of the borrowed funds. Borrowers would invest more on the equities of the risky production sector. This is because if the returns of those equities are high, they would repay the promised return and keep the remaining profits from their investment. However, if the returns are low, they can just default and avoid further losses. Such risk-shifting behavior, which tends to make the risky (export) sector equities overpriced, will lead to also to overinvestment in this sector, and excessive allocation of labor to it. As a result, the production and export pattern to be geared towards the risky sector, which may expose a country to increased macroeconomic volatility. Chapter Two provides an empirical test to key predictions of the theory, which is developed in Chapter One. Specifically, it uses cross-country panel data to test whether low degree of monitoring borrowers by financial intermediaries would contribute to a shift in a country's exports towards risky production sectors. It analyzed the data measuring the riskiness across sectors, developed by Koren and Tenreyro (2007) and Di Giovanni and Levchenko (2011), from developed and developing economies over the period of 1978-2004. The explanatory variable of interest is the creditor rights index (CRI) because it captures the degree of enforcing debt repayment and thus reflects the lenders' ability to observe the borrowers' actions. The dependent variable is the risk content of exports index, which is constructed by multiplying the square of each sector's share of exports to the variance of the sectoral value added growth. The higher value of the index indicates that a country has higher shares of exports in the sectors whose productions are more volatile. Using fixed effects regressions, the results revealed that countries where lenders have lower ability to monitor borrowers are the ones with higher risk content of exports. This finding remained robust even after excluding the most volatile production sectors from the analysis. And when separately examining the effects of the four different components of creditor rights index, it is shown that the effects of creditor rights arises from the restrictions on the borrowers' filing for reorganization. Chapter Three, addressing international equity flows, provides empirical tests to three theory-based hypotheses concerning foreign equity investment in the presence of liquidity risk. First, the FDI-to-FPI price differential is negatively related to liquidity risk (the "Price Discount Hypothesis"). The idea is that direct investments would incur a price discount because market participants do not know whether the FDI investor liquidates a firm because of an idiosyncratic liquidity shock, or because, as an informed investor, the firm is hit by a productivity shock. Second, the FDI-to-FPI composition would skew towards FPI if investors expect to experience liquidity shortage in the future (the ""Equity-Composition Hypothesis"). Since direct investments are more costly to liquidate, due to the price discount, investors would be inclined to hold less FDI if they expect more severe liquidity shock. The third hypothesis, on the other hand, states that the FDI-to-FPI composition would skew towards FDI if the past FDI-to-FPI stocks were larger (the "Strategic Complementarity Hypothesis"). If the initial proportion of direct investments is higher, it is more likely that a direct investment is sold due to liquidity needs. This improves the price of the prematurely sold direct investment, creating an incentive for more investors to choose FDI rather than FPI. These hypotheses are examined using the country level data consisting of a large set of developed and developing countries over the period 1970 to 2004. The nationwide sales of external assets are used as a proxy for liquidity problems, and the effect of expected liquidity problems on stock prices, the ratio of FPI to FDI and gross flows of FDI and FPI are tested. The empirical results support the three hypotheses.
creditor rights; creditor protection; CRI; exports; exports riskiness; FDI; FPI; liquidity crisis; equity flows
Kiefer, Nicholas Maximillian; Prasad, Eswar Shanker
Ph.D. of Economics
Doctor of Philosophy
dissertation or thesis