Corporate Investment in Emerging Markets: Financing vs. Real Options Channel

By Delong Li, Nicolas E Magud, Fabian Valencia

December 30, 2015

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Delong Li, Nicolas E Magud, and Fabian Valencia. Corporate Investment in Emerging Markets: Financing vs. Real Options Channel, (USA: International Monetary Fund, 2015) accessed December 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We examine how firm and country heterogeneity shape the response of corporate investment in emerging markets to changes in global interest rates and volatility. We test for the presence of (i) a financing channel originating from changes in the costs of external borrowing and (ii) a real options channel—reflecting firms’ option values to delay investment. We find evidence of the coexistence of both channels. Financially weaker firms reduce investment by more in response to higher interest rates or volatility, while firms with stronger balance sheets become less willing to invest after volatility spikes. Furthermore, the intensity of the financing channel diminishes for firms in countries with lower public debt, higher foreign reserves, or deeper financial markets.

Subject: Asset and liability management, Corporate investment, Currencies, Emerging and frontier financial markets, Financial markets, Liquidity indicators, Liquidity management, Money, National accounts, Public debt

Keywords: Cash flow ratio, Corporate investment, Currencies, Emerging and frontier financial markets, Financial frictions, Financing channel, Global, Interest rate shock, Investment, Investment schedule, Liquidity management, Net leverage, Real options, Standard deviation, Uncertainty shocks, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2015/285
Stock No:

WPIEA2015285
ISBN:

9781513539935
ISSN:

1018-5941

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