Evidence on the External Finance Premium from the US and Emerging Asian Corporate Bond Markets
University of Nottingham; Bank of England; Centre for Economic Policy Research (CEPR)
University of Glasgow
July 31, 2008
HKIMR Working Paper No. 14/2008
Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds especially for the emerging Asian market. In this paper we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for the United States, Hong Kong, China, Korea and Thailand during 1995-2005 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity we show that financial variables appear to be both statistically and quantitatively more important in the Asian market than in the US. Finally, the premium is more sensitive to firm-level variables during credit crunches, recessions and sudden stops than other periods, with stronger effects for the Asian bond market.
Number of Pages in PDF File: 28
Keywords: Financing Constraints, External Finance Premium, Emerging Asian Markets
JEL Classification: F32, F34, G32
Date posted: August 8, 2008
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