Winners and losers from sovereign debt inflows

We study the effects of sovereign debt inflows on domestic firms. To do so, we exploit episodes of large sovereign debt inflows, which follow the announcements of the inclusion of six emerging countries into major sovereign debt indexes. We find that these events reduce government bond yields, appre...

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Bibliographic Details
Published in:Journal of international economics 2021-05, Vol.130, p.103446, Article 103446
Main Authors: Broner, Fernando, Martin, Alberto, Pandolfi, Lorenzo, Williams, Tomas
Format: Article
Language:English
Subjects:
Analysis
Bonds
Capital inflows
Developing countries
Emerging markets
Exchange rate
Foreign exchange
Government securities
Government yields
Prices and rates
Sovereign debt
Stock prices
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Summary:We study the effects of sovereign debt inflows on domestic firms. To do so, we exploit episodes of large sovereign debt inflows, which follow the announcements of the inclusion of six emerging countries into major sovereign debt indexes. We find that these events reduce government bond yields, appreciate the domestic currency, and have heterogeneous stock-market effects on domestic firms. Firms operating in tradable industries experience lower returns than firms in non-tradable industries. In addition, financial firms, government-related firms, and firms that rely more on external financing experience higher returns. The effect on financial and government-related firms is stronger in countries that display larger reductions in government bond yields. The effect on tradable firms is stronger in countries that display stronger appreciations. We provide a stylized model that rationalizes these results. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in emerging countries.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2021.103446