Serechetapongse, Anuk. 2013. Essays On Risk Biased Exports And Liquidity-Based Determinants Of
International Equity Flows. Doctoral Dissertation, Cornell University.
This dissertation is
comprised of three essays. Chapter One develops a general equilibrium 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.
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