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Senior Economist (415) 974-3131 |
Research interests: |
– Current Unpublished Working Papers Institutional Weakness and Stock Price Volatility We find an empirical regularity that stronger creditor protection reduces the volatility of stock market prices. We analyze two distinct mechanisms that characterize equity price volatility: government guarantees and creditor protection. Using a Tobin q model, we demonstrate that weak creditor protection that gives rise to government guarantees and tightens credit constraints, increases stock price volatility. Empirically, accounting for the probability of financial
crises, we find that government guarantees and tighter credit constraints increase aggregated stock price volatility.
Beyond Kuznets: Persistent Regional Inequality in China Regional inequality in China appears to be persistent and even growing in the past two decades. We study potential offsetting factors and interprovincial migration to shed light on the sources of this persistence. We find that some of the inequality could be attributed to differences in quality of labor, industry composition, and geographical location of provinces. We also demonstrate that interprovincial migration, while driven in part by wage differences across provinces, does not offset these differences. Finally, we find that interprovincial redistribution did not help offset regional inequality during our sample period.
Who Drove the Boom in Euro-Denominated Bond Issues? We make use of micro-level data for over 45,000 private bond issues by over 5000 firms from 22 countries in 1990-2006 to analyze the impact that the launch of the EMU had on their currency denomination. The use of the micro data allows us to isolate the "euro effect" on new and seasoned bond issuers while conditioning on individual issue characteristics. To our knowledge, ours is the first systematic analysis of this topic at the micro level. We find that the impact on new issuers is larger than on seasoned issuers and that most of the increase in the euro-denominated bond issuance by seasoned borrowers was along the "extensive" margin, i.e. borrowers switching currency denomination of their issues. Insofar as new entrants to the bond market will define the overall currency composition in the long run, these results imply that
aggregate studies might be underestimating the euro effect. We also find that to a large extent the increase in euro issuance was "at the expense" of U.S. dollar issuance, suggesting that euro
competes with the U.S. dollar as a currency of choice for international financial transactions.
Did Foreign Direct Investment Put an Upward Pressure on Wages in China? In this paper we study the extent to which foreign direct investment (FDI) could have contributed to recent increase in wages in China. Using a World Bank survey data set of 1500 Chinese enterprises conducted in 2002, we find that the presence of FDI has both direct and indirect effects on wages of skilled workers, while it does not
appear to affect wages of production workers. Moreover, we find that the indirect effect of the FDI presence on wages of skilled workers is limited to private firms. We further find that observed quality of skilled workers in state owned enterprises (SOEs) declines
in the presence of FDI in the same industry and region. We discuss potential reasons for such discrepancy in the FDI effects on private firms' and SOEs' labor practices. These findings highlight the relevance of labor market institutions in determining FDI spillovers.
– Published Articles (Refereed Journals and Volumes) Foreign Direct Investment and Incentives to Innovate and Imitate Are There Productivity Spillovers from Foreign Direct Investment in China? We review previous literature on productivity spillovers of foreign direct investment (FDI) in China and conduct our own analysis using a firm-level data set from a World Bank survey. We find that the evidence of FDI spillovers on the productivity of Chinese domestic firms is mixed, with many positive results largely due to aggregation bias or failure to control for endogeneity of FDI. Attempting over 6000 specifications which take into account forward and backward linkages, we fail to find evidence of systematic positive productivity spillovers from FDI in China.
Currency Crises and Foreign Credit in Emerging Markets: Credit Crunch or Demand Effect? Currency crises of the past decade highlighted the importance of balance-sheet effects of currency crises. In credit-constrained markets such effects may lead to further declines in credit. Controlling for a host of fundamentals, we find a systematic decline in foreign credit to emerging market private firms of about 25% in the first year following currency crises, which we define as large changes in real value of the currency. This decline is especially large in the first five months, lessens in the second year and disappears entirely by the third year. We identify the effects of currency crises on the demand and supply of credit and find that the decline in the supply of credit is persistent and contributes to about 8% decline in credit for the first two years, while the 35% decline in demand lasts only five months.
Review of "China's Financial Transition at a Crossroads" by C. Calomiris (ed.) Do Banks Price Their Informational Monopoly? Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's creditworthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, particularly for firms that are revealed to be safe. We test this hypothesis by comparing banks' loan pricing policies before and after borrowers gain access to public bond market. To isolate the information hold-up cost we further compare the change in the loan policies between borrowers that already had a credit rating at the time of their bond IPO and borrowers that get their first credit rating at that time. Our findings show that firms are able to borrow at lower interest rates after their bond IPO and that these savings are larger for safer firms. We also find that, among safe firms, those that get their first credit rating at the time of their bond IPO benefit from larger interest rate savings than those that already had a credit rating. These findings provide support for the hypothesis that banks price their informational monopoly. Finally, we find that while entering the public bond market may reduce these informational rents, it is also costly to firms because they have to pay higher underwriting costs on their IPO bond.
The Decision to First Enter the Public Bond Market: The Role of Firm Reputation, Funding Choices, and Bank Relationships This paper uses survival analysis to investigate the timing of a firm's decision to issue for the first time in the public bond market. We find that firms that are more creditworthy and have higher demand for external funds issue their first public bond earlier. We also find that issuing private bonds or taking out syndicated loans is associated with a faster entry to the public bond market. According to our results, the relationships that firms develop with investment banks in connection with their private bond issues and syndicated loans further speed up their entry to the public bond market. Finally, we find that a firm's reputation has a "U-shaped" effect on the timing of a firm's bond IPO. Consistent with Diamond's reputational theory, firms that establish a track record of high creditworthiness as well as those that establish a track record of low creditworthiness enter the public bond market earlier than firms with intermediate reputation.
Sovereign Debt Crises and Credit to the Private Sector We use micro-level data to analyze emerging markets' private sector access to international debt markets during sovereign debt crises. We find that these crises are systematically accompanied by a decline in foreign credit to domestic private firms, both during debt renegotiations and for over two years after restructuring agreements are reached. This decline is large, statistically significant, and robust. We find that this effect is concentrated in the nonfinancial sector and is different for firms in the exporting and in the non-exporting sectors. We also find that the magnitude of the effect depends on the type of debt restructuring agreement.
Book Review: Sound Policies for Emerging Markets' Financial Stability Bonds or Loans? The Effect of Macroeconomic Fundamentals The costs of debt crises are not invariant to the foreign debt instrument composition: bank loans or bonds. The lending boom of the 1990s witnessed considerable variation over time and across countries in the debt instrument used by emerging market (EM) borrowers. This paper tests how macroeconomic fundamentals affect the composition of international debt instruments used by EM borrowers. Analysis of micro-level data using ordered probability model shows that macroeconomic fundamentals explain a significant share of variation in the ratio of bonds to loans for private borrowers, but not for the sovereigns.
Rating Agencies and Sovereign Debt Rollover In order to explore how credit ratings may affect financial markets, we analyze a global game model of debt roll-over in which heterogeneous investors act strategically. We find that the addition of the rating agency has a non-monotonic effect on the probability of default and the magnitude of the response of capital flows to changes in fundamentals. We also establish that introducing a rating agency can bring multiple equilibria to a market that otherwise would have a unique equilibrium.
Flight to Quality: Investor Risk Tolerance and the Spread of Emerging Market Crises World Experience in Fighting High Inflation Interprovincial Inequality in China The EMU Effect on the Currency Denomination of International Bonds Did Large Recalls of Chinese Consumer Goods Lower U.S. Imports from China? Do Monetary Aggregates Help Forecast Inflation? Prospects for China's Corporate Bond Market Book review: China's Financial Transition at a Crossroads by Calomiris (Cambridge University Press 2007) Comment on "What Accounts for the Rising Sophistication of China's Exports?" by Wang and Wei Does Creditor Protection Mitigate the Likelihood of Financial Crises and Their Effect on the Stock Market? Finding reliable indicators that predict the likelihood and severity of crises across countries has been a frustrating quest for economists. This column suggests that countries with better creditor protection suffer less when a crisis hits.
Beggar-thy-neighbor; Currency; Currency appreciation and depreciation; Currency devaluation and revaluation; Dirty float; Elasticity; Static expectations; Overshooting; Foreign reserves; Economic sterilization; Discounted present value; Stocks and flows Lessons from Russian 1998 Financial Crisis Russian Foreign Trade: Influence of Ruble Real Exchange Rate and Regulations Real Exchange Rate: Meanings, Ways of Measurement | |