Multilateral Debt Relief Through the Eyes of Financial Markets
Claudio E. Raddatz
Central Bank of Chile; World Bank
March 1, 2009
World Bank Policy Research Working Paper No. 4872
The economic benefits of debt relief for recipient countries have been the subject of arduous debate, at least partly motivated by the difficulty of identifying the causal effect of debt relief on economic performance-given that performance itself may drive the decision to grant relief. This paper conducts an event study to assess the economic consequences of multilateral debt relief for recipient countries that is robust to these reverse causality issues. It estimates the response of the stock prices of South African multinationals with subsidiaries in those countries to the announcement of debt relief initiatives, and shows that stock prices exhibit a significant increase above those of other firms, especially around the launching of the recent Multilateral Debt Relief Initiative. The improvement in financial markets'assessment of the value of these multinationals is consistent with lower expected levels of future taxation in the recipient countries. Overall, the results are consistent with the"debt overhang"argument for debt relief.
Number of Pages in PDF File: 45
Keywords: Debt Markets, External Debt, Banks & Banking Reform, Bankruptcy and Resolution of Financial Distressworking papers series
Date posted: March 25, 2009
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