Capital Inflows, Equity Issuance Activity, and Corporate Investment
59 Pages Posted: 16 Apr 2018 Last revised: 22 Nov 2018
Date Written: April 12, 2018
This paper uses issuance-level data to study how equity capital inflows that enter emerging market economies affect equity issuance and corporate investment. It shows that foreign inflows are strongly correlated with country-level issuance. The relation especially reflects the behavior of large firms, defined as those with large market value of equity. To identify supply-side shocks, capital inflows into each country are instrumented with exogenous changes in other countries' attractiveness to foreign investors. Shifts in the supply of foreign capital are important drivers of increased equity inflows. Instrumented contemporaneous and lagged capital inflows lead large firms to raise new equity, which they use to fund investment. The results indicate that inflows imply more than a transfer of equity ownership from domestic to foreign investors. Foreign purchases of equity have financial and real consequences for firms.
Keywords: Capital Markets and Capital Flows, Securities Markets Policy & Regulation, Capital Flows, International Trade and Trade Rules, Mutual Funds, Non Bank Financial Institutions, Investment and Investment Climate, Fiscal & Monetary Policy, Consumption
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