The Impacts of Two-Direction Capital Account Policies on Corporate Bond Issuance: Evidence from Six Latin American Countries

Abstract

We explore the impacts of capital account tightening (treatment) and loosening (reversal) on corporate bond issuance. Utilizing high-frequency policy changes in six Latin American countries between 1991 and 2019, we find that foreign firms are less likely to issue bonds denominated in domestic currency but more likely to issue US dollar bonds than domestic firms when capital account is tightening. In contrast, domestic and foreign firms are indifferent in bond issuance when capital account is loosening. These findings are robust to confounding shocks and policy endogeneity. We further exploit variations in industry-specific financial vulnerability and country-specific financial development to explain the differentiated bond issuances through firms’ disproportionate financial frictions. Coordinating macroprudential and capital account policies helps to reduce the asymmetric risk exposure between domestic and foreign firms.

Keywords: capital account tightening and loosening, treatment reversal, corporate bond issuance, foreign firms