TY  - JOUR
AU  - Tong,Hui
AU  - Wei,Shang-Jin
TI  - The Composition Matters: Capital Inflows and Liquidity Crunch during a Global Economic Crisis
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15207
PY  - 2009
Y2  - August 2009
UR  - http://www.nber.org/papers/w15207
L1  - http://www.nber.org/papers/w15207.pdf
N1  - Author contact info:
Hui Tong
Research Department
IMF Washington DC
700 19th Street N.W.
Washington, DC 20431
E-Mail: htong@imf.org

Shang-Jin Wei
Graduate School of Business
Columbia University
Uris Hall 619
3022 Broadway
New York, NY 10027-6902
Tel: 212/854-9139
E-Mail: shangjin.wei@columbia.edu
AB  - International capital flows, while potentially beneficial, are said to increase a country’s vulnerability to crisis – especially if they are skewed to non-FDI types. This paper studies whether the volume and composition of capital flows affect the degree of credit crunch faced by a country’s manufacturing firms during the 2007-09 crisis. Using data on 3823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. The volume of capital flows per se has no significant effect on the severity of the credit crunch. However, the composition of capital flows matters a great deal: pre-crisis exposure to non-FDI capital inflows worsens the credit crunch, while exposure to FDI alleviates the liquidity constraint. Similar results also hold when we perform an event study surrounding the Lehman Brothers bankruptcy.
ER  -