Corporate Investment in Emerging Markets: Financing vs. Real Options Channel

31 Pages Posted: 17 Feb 2016

See all articles by Delong Li

Delong Li

Johns Hopkins University

Nicolás E. Magud

International Monetary Fund (IMF)

Fabián Valencia

International Monetary Fund (IMF)

Date Written: December 2015

Abstract

We examine how firm and country heterogeneity shape the response of corporate investment in emerging markets to changes in global interest rates and volatility. We test for the presence of (i) a financing channel originating from changes in the costs of external borrowing and (ii) a real options channel-reflecting firms' option values to delay investment. We find evidence of the coexistence of both channels. Financially weaker firms reduce investment by more in response to higher interest rates or volatility, while firms with stronger balance sheets become less willing to invest after volatility spikes. Furthermore, the intensity of the financing channel diminishes for firms in countries with lower public debt, higher foreign reserves, or deeper financial markets.

Keywords: financial frictions, real options, uncertainty shocks, interest, interest rates, markets, cash flows, General, All Countries,

JEL Classification: F30, E20, E60, F3, E6

Suggested Citation

Li, Delong and Magud, Nicolas E. and Valencia, Fabian V., Corporate Investment in Emerging Markets: Financing vs. Real Options Channel (December 2015). IMF Working Paper No. 15/285. Available at SSRN: https://ssrn.com/abstract=2733586

Delong Li (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Nicolas E. Magud

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Fabian V. Valencia

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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