Evidence on the External Finance Premium from the US and Emerging Asian Corporate Bond Markets

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 14/2008

Journal of Banking and Finance, 36, 3048-3059, November 2012

28 Pages Posted: 8 Aug 2008 Last revised: 6 Sep 2022

Date Written: July 31, 2008

Abstract

This working paper was written by Paul Mizen (University of Nottingham) and Serafeim Tsoukas (University of Nottingham).

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.

Keywords: Financing Constraints, External Finance Premium, Emerging Asian Markets

JEL Classification: F32, F34, G32

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Evidence on the External Finance Premium from the US and Emerging Asian Corporate Bond Markets (July 31, 2008). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 14/2008, Journal of Banking and Finance, 36, 3048-3059, November 2012, Available at SSRN: https://ssrn.com/abstract=1212302 or http://dx.doi.org/10.2139/ssrn.1212302

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