The Search for Yield and the Size Premium in Emerging Market Corporate Debt

43 Pages Posted: 20 Dec 2018

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Mauricio Larrain

Columbia University

Sergio L. Schmukler

World Bank - Development Research Group (DECRG)

Tomás Williams

George Washington University - Department of Economics; George Washington University - Elliott School of International Affairs (ESIA)

Date Written: December 15, 2018

Abstract

Emerging market corporations have significantly increased their borrowing in international markets after the global financial crisis. We show that this expansion was led by large-denomination bond issuances (bonds with face values exceeding US$300 million, and often exceeding US$500 million). The drastic shift in the pattern of bond issuances reflects increased investor willingness to purchase emerging market corporate bonds so long as they are included in international bond indexes, which require face values of at least US$300 and US$500 million. Inclusion in the index gives investors the advantage of holding more liquid bonds, which also makes them more similar to those issued by U.S. corporates and emerging market sovereigns. Additionally, those bonds allow investors to target performance closer to the market benchmark. After 2008, emerging market firms started facing a new trade-off. They could borrow at a lower cost (a full percentage point lower) by issuing index-eligible bonds, which often imply raising more financing than needed. Or, they could borrow smaller quantities at a higher cost, while avoiding accumulating substantial cash assets. Because the liquidity premium for large-denomination bonds is sizable, many companies have issued them. As a result, larger firms have become more likely to issue them and some smaller firms have issued large bonds for the first time, which has entailed large increases in their post-issuance cash holdings. The overall changes after 2008 in emerging market corporate issuance are not apparent in advanced economies.

Keywords: benchmark indexes, corporate bonds, corporate financing, emerging markets

JEL Classification: F21, F23, F32, F36, F65, G11, G15, G31

Suggested Citation

Calomiris, Charles W. and Larrain, Mauricio and Schmukler, Sergio and Williams, Tomás, The Search for Yield and the Size Premium in Emerging Market Corporate Debt (December 15, 2018). Available at SSRN: https://ssrn.com/abstract=3303628 or http://dx.doi.org/10.2139/ssrn.3303628

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mauricio Larrain

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Sergio Schmukler (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN MC 3-301
Washington, DC 20433
United States
202-458-4167 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/en/about/people/s/sergio-schmukler

Tomás Williams

George Washington University - Department of Economics ( email )

Monroe Hall, Suite 340
2115 G Street, NW
Washington, DC 20052
United States

George Washington University - Elliott School of International Affairs (ESIA) ( email )

2201 G Street, N.W.
Washington, DC 20052
United States

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