Winners and Losers from Sovereign Debt Inflows

Fernando Broner, Alberto Martin, Lorenzo Pandolfi, Tomas Williams

NBER Working Paper No. 27772
Issued in September 2020
NBER Program(s):International Finance and Macroeconomics

We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries that are due to the announcements of these countries' inclusion in two major local-currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous stock market effects on domestic firms. Firms operating in tradable industries experience lower abnormal returns than firms in non-tradable industries. In addition, financial, government-related, and firms that rely more on external financing experience relatively higher abnormal 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 where the domestic currency appreciates more. 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 economies.

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Document Object Identifier (DOI): 10.3386/w27772

Forthcoming: Winners and Losers from Sovereign Debt Inflows, Fernando Broner, Alberto Martin, Lorenzo Pandolfi. in NBER International Seminar on Macroeconomics 2020, Frankel and Rey. 2020

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