Globalization of Corporate Risk Taking

Valentina Bruno
bruno@american.edu
Hyun Song Shin
hsshin@princeton.edu
March 8, 2014
Abstract
We explore how the interconnected nature of global nance aects corporate risk tak-
ing. We show that a common global factor known to be associated with uctuations in
cross-border banking is also strongly associated with common comovements in corporate
risk-taking across a diverse universe of international rms. Our study contributes to the
international business literature as the rst comprehensive investigation of how global -
nancial conditions induce greater synchronization of risk-taking across regions and sectors.
eywords! "orporate risk-taking# global li$uidity# capital ows# nancial crises# multi-
national companies

We are grateful to the editor# %avid &eeb# and three referees for their comments and guidance on an earlier
draft. We thank 'ti(n "laessens for comments# )ui *ong# and 'hang-+in Wei for sharing their data series on
nancial dependence# and +onathan Wallen for research assistance.
1
1 Introduction
Nowhere has the impact of globaliation been larger than in the !nancial system" #ur tas$ in
this paper is to re%isit the issue of how the globaliation of !nance has a&ecte' the relationship
between ris$ an' return in international business acti%ities"
(he tra'itional approach to international in%estment, which buil's on insights from portfolio
theory an' !nance, is that international 'i%ersi!cation results in a collection of assets that
re'uces ris$ an' allows the !rm to optimie the tra'eo& between ris$ an' return )Shapiro
)1*+8,," -ollowing the wor$ of Hymer )1*.0,, howe%er, the tra'itional !nance/base' approach
has increasingly gi%en way to the %iew of the !rm as a facilitator of international acti%ities
that reap the bene!ts of synergies an' complementarities across tas$s" 0n'er this alternati%e
approach, the international reach of business acti%ities is %iewe' more in terms of resource an'
acti%ity specialiation through the assets that enable such acti%ities, rather than in terms of
mar$et segmentation an' 'i%ersi!cation"
1
1n'ee', 2eeb, 3wo$ an' Bae$ )1**8, 'emonstrate'
that the ris$ pro!le of multinational corporations )MN4s, 'oes not easily !t into the simple
picture of ris$ 'i%ersi!cation implie' by the tra'itional !nance/base' approach" (hey showe'
that e%en if the correlation of pro!ts across regions 'eclines through greater 'i%ersi!cation, an
increase in the %ariability of pro!ts coul' result in higher systematic ris$, as measure' by the
beta of the returns of the multinational corporation"
#ur paper a''resses one possible source of the increase' %ariability of returns of !rms that
are open to greater global in5uences, she''ing further light on the results in 2eeb, 3wo$ an'
Bae$ )1**8," 6e pro%i'e e%i'ence of a 7global factor8 in !nancial con'itions that in'uces
como%ements in !nancial con'itions across bor'ers an' which, simultaneously, in'uces !rms to
ta$e on greater ris$s" 1n the presence of such a global factor, a !rm with a greater international
footprint may be a&ecte' more sensiti%ely in its ris$/ta$ing 'ecisions in spite of the geographical
'i%ersi!cation"
1n a nutshell, the argument rests on the following forces" -inancial spillo%ers imply that
1
%unning and ,itelis -.//01 is a recent survey of )ymer2s work.
2
global factors 'etermine cre'it con'itions in all locations through the institutional structure of
the global ban$ing system" 9s such, more accommo'ati%e cre'it con'itions associate' with
global li:ui'ity at the center lea's to lower ris$/a';uste' len'ing rates that in'uce !rms to
apply lower 'iscount rates )an' hence higher net present %alues, in their in%estment 'ecisions"
#ther things being e:ual, !rms therefore ta$e on more in%estment pro;ects for any gi%en pro!le
of e<pecte' fun'amental cash 5ows" 1n this way, global factors can in'uce como%ements in
ris$/ta$ing an' in'uce greater synchroniation of ris$/ta$ing across regions an' sectors"
1n 'e%eloping our arguments, we 'raw on the recent literature on 7global li:ui'ity8 in inter/
national !nance that e<plains how !nancial con'itions are transmitte' across bor'ers an' how
cross/bor'er spillo%er e&ects are relate' to ris$/ta$ing by ban$s an' other !rms" (he report
of the wor$ing group of central ban$ers assemble' by the Ban$ for 1nternational Settlements
)B1S )2011,, has gi%en impetus to the stu'y of global li:ui'ity, which spurre' research on its
un'erlying mechanisms )e<amples inclu'e Miran'a/9grippino an' 2ey )201=,, 2ey )201=,, an'
Bruno an' Shin )201=,,"
#ur empirical in%estigation in this paper 'raws on the framewor$ in Bruno an' Shin )201=,,
which lays out a theory of the propagation of global li:ui'ity through the operation of the
global ban$ing system" 1n this framewor$, ban$s with global reach 'raw wholesale fun'ing in
0S 'ollars from money mar$et fun's )MM-s, in the 0nite' States an' then allocate the fun's
to ban$s elsewhere in the worl'" (he cost of wholesale ban$ fun'ing pro%i'e' by global ban$s
at the center to the regional ban$s in the periphery then 'epen's on the supply an' 'eman'
for such interban$ fun'ing" >i%en the interconnecte' nature of the global ban$ing system, the
cost of cre'it to en'/user borrowers at the en' of the cre'it chain re5ects, in part, the acti%ity
of global ban$s at the center of the interconnecte' global ban$ing system" Bruno an' Shin
)201=, show two results" -irst, the ability of global ban$s to fun' themsel%es at the center
of the system has the attributes of a common 7global factor8 that a&ects cre'it con'itions at
the periphery, an' secon', the le%erage of the global ban$s ser%es as a summary statistic of the
single global factor associate' with global !nancial con'itions"
(he global factor in Bruno an' Shin )201=, is also associate' with a greater inci'ence of
=
capital 5ows through the ban$ing sector that are synchronie' across regions, in the manner
'escribe' by 4al%o, ?ei'erman an' 2einhart )1**=, 1**., in the conte<t of emerging economy
capital 5ow booms in the early 1**0s" 1n turn, the portfolio choice of global ban$s means that
lower loan rates for cross/bor'er len'ing also en' up a&ecting the purely local cre'itor/'ebtor
relationships" 1n this way, the global factor in cre'it mar$ets impacts all borrowers, whether
they are fun'e' purely from 'omestic fun's or through cross/bor'er capital 5ows"
By pointing to the increasing importance o%er time of global factors in ris$/ta$ing, our paper
focuses on the time series 'imension of corporate ris$/ta$ing an' thus complements the e<isting
literature on corporate ris$/ta$ing that has mostly focuse' on the cross/section 'imension across
countries, where the 'i&erences lie along 'imensions that are highly persistent o%er time" -or
instance, @ohn, ?ito%, an' Aeung )2008, e<amine the relationship between in%estor protection
an' ris$/ta$ing by !rms as manifeste' in their in%estment 'ecisions" (hey !n' that stronger
in%estor protection is more con'uci%e to corporate ris$/ta$ing, gi%ing support to the hypothesis
that stronger in%estor protection counteracts the ten'ency towar' more conser%ati%e in%estment
choices of entrenche' managers or insi'ers who are moti%ate' to preser%e their pri%ate bene!ts
rather than ta$ing on ris$s that may result in loss of control" More broa'ly, the cross/section
stu'ies of ris$/ta$ing are in the spirit of the law an' economics literature, where the emphasis is
on the :uality of institutions an' the interactions between ownership an' control )Shleifer an'
Vishny )1*8.,, Bur$art, Banuni, an' Shleifer )200=,, -accio, Marchica, an' Mura )2011,, an'
9n'erson, Curu, an' 2eeb )2012,,"
#ur paper presents three broa' sets of empirical results that together paint a coherent picture
of the globaliation of corporate ris$/ta$ing"
#ur !rst set of results come from panel regressions using the uni%erse of non/!nancial !rms
in 4ompustat >lobal" 1n these regressions, we !n' that time series %ariation in global li:ui'ity
as pro<ie' by interme'iary le%erage shows up strongly as a global 'eterminant of corporate ris$/
ta$ing" 1n these regressions, corporate ris$/ta$ing is pro<ie' by the country/a';uste' stan'ar'
'e%iations in !rm return on assets )2#9,, as commonly 'e!ne' in the literature" 6e %erify
that our pro<ies for global li:ui'ity show through consistently as an important common global
4
%ariable that in5uences corporate ris$/ta$ing across regions an' across in'ustry sectors"
#ur results are consistent with the mechanism in which accommo'ati%e cre'it con'itions
associate' with global li:ui'ity at the center is associate' with greater ris$/ta$ing by ultimate
borrowers at the en' of the cre'it chain in all the regions through lower ris$/a';uste' len'ing
rates" Such lower len'ing rates in'uce !rms to apply lower 'iscount rates in their in%estment
'ecisions, so that they ta$e on more in%estment pro;ects for any gi%en pro!le of e<pecte' fun/
'amental cash 5ows" (o the e<tent that MN4s are more e<pose' to the global factor, we may
con;ecture that their susceptibility to the global factor will be greater than that for non/MN4s"
1n fact, we !n' that a change in global li:ui'ity has a greater impact on earnings %olatility for
MN4s than for non/MN4s"
Secon', we 'el%e 'eeper into the impact of global li:ui'ity on corporate ris$/ta$ing, while
at the same time attempting to alle%iate potential en'ogeneity, by loo$ing at the e<ternal
!nancial 'epen'ence of !rms )2a;an an' Dingales, 1**8, as a pro<y for the 'egree of li:ui'ity
constraints face' by companies" 6e e<amine whether global li:ui'ity a&ects !rms in nee' of
e<ternal !nance more than those less 'epen'ent on e<ternal !nance, an' we in'ee' !n' that
global li:ui'ity impacts corporate ris$/ta$ing more in those !rms that are 'epen'ent on e<ternal
!nance" Such !rms thus bene!t more from permissi%e !nancial con'itions an' greater cre'it
a%ailability" -urthermore, we use 'ynamic panel >MM )generalie' metho' of moments, to
%erify that our results are consistent with the cutting e'ge 'iagnostic tests for en'ogeneity"
-inally, we in%estigate the impact of the 2001 an' 200+/200* global !nancial crises, as well
as 'omestic !nancial crises that ha%e more localie' impact" More sophisticate' !nancial in/
terme'iaries an' large reliance on wholesale an' short/term fun'ing create' systemic fragility"
4laessens et al" )2010, show that those countries that ha' closer lin$s with the 0S !nancial
system were the !rst to be a&ecte' 'uring the great !nancial crisis" (ong an' 6ei )2011, !n'
that the 'ecline in stoc$ prices was more se%ere for !rms that were more 'epen'ent on e<ternal
!nance" 1mportantly, they !n' that pre/crisis e<posure to non/-C1 capital in5ows )foreign port/
folio an' ban$ len'ing, worsene' the cre'it crunch" 6e sort our 'ata into the pre/crisis perio'
an' post/crisis perio' an' e<amine whether post/crisis outcomes are lin$e' to pre/crisis global
E
li:ui'ity con'itions an' ris$/ta$ing attitu'es" 6e !n' that !rms more 'epen'ent on e<ternal
!nance an' with greater ris$/ta$ing in the pre/crisis perio' e<perience a more se%ere cre'it
crunch, as re5ecte' in their stoc$ price an' 2#9" 1t is our contention that the cre'it crunch was
particularly se%ere for multinational corporations as these are the !rms that are most susceptible
to the 5uctuations in global li:ui'ity con'itions" (his result shows the 'ouble/e'ge nature of
global li:ui'ity for corporate ris$/ta$ing"
6e begin in the ne<t section with a 'etaile' 'escription of our 'ata an' some institutional
bac$groun' for our pro<y for global li:ui'ity" 6e then present the series of empirical results
s$etche' abo%e, which set up the !nal section, where we 5ag some promising 'irections for future
wor$"
2 Institutional Background and Data
#ur empirical in%estigation 'raws on the 4ompustat >lobal uni%erse of non/!nancial !rms o%er
the perio' 1*8+ to 2010, inclu'ing both acti%e an' inacti%e !rms to a%oi' sur%i%orship bias issues"
6e e<clu'e !nancial companies )S14 co'es between .000 an' .**0, for two reasons" -irst, we are
intereste' in analying the impact of 5uctuating cre'it con'itions on )non/!nancial, corporate
operations" Secon', measures of ris$/ta$ing are 'i&erent for !nancial an' non/!nancial !rms
)see, e"g", ?ae%en an' ?e%ine, 200*," 6e also e<clu'e countries with less than 20 obser%ations
o%er the entire perio', o&shore centers )Bermu'a an' 4ayman 1slan's,, an' countries in 9frica,
which are less a&ecte' by global li:ui'ity 5ows 'ue to their un'er'e%elope' !nancial systems
an' for whom only a few obser%ations are a%ailable at the !rm le%el" 6e also e<clu'e North
9merican !rms for the institutional reason that the 0S is at the center of the global li:ui'ity
propagation channel, although inclu'ing 0S an' 4ana'ian !rms 'oes not a&ect our :ualitati%e
conclusions"
6e perform cross/country !rm/le%el analyses for two separate perio's" 6e implement panel
regressions for the pre/200+ crisis perio'F !rm/le%el obser%ations of corporate ris$ ta$ing are
regresse' on %ariables that pro<y global li:ui'ity, while controlling for other rele%ant factors"
.
6e also analye the post/crisis e&ect on corporate ris$/ta$ing an' stoc$ mar$et returns" (he
pre/crisis sample spans from 1*8+ to the en' of 200+, an' the post/crisis sample co%ers the
perio' from 2008 to 2010" 9ccor'ing to NBG2 business cycle 'ates, the recession associate'
with the !nancial crisis starte' in Cecember 200+ an' en'e' in @une 200*, but the 0S crisis
was imme'iately followe' by the Guroone crisis" (herefore, we treat the 2008 to 2010 perio'
as our secon' perio' associate' with 'istresse' con'itions in global !nance" 1n a''ition to the
great !nancial crisis of 200+/200*, the NBG2 i'enti!es another perio' of global recession after
the internet bubble burst in 2001" 6e thus replicate our analysis also for the perio' pre/ an'
post/2001"
-ollowing the 'e!nition in @ohn et al" )2008,, we compute the 'egree of ris$/ta$ing in !rmsH
operations as the country/a';uste' %olatility of !rm/le%el earnings )ROA," Speci!cally, for
each !rm with a%ailable earnings an' total assets for at least E years, we compute the 'e%iation
of the !rmHs earnings before interests an' ta<es )GB1(C9,Iassets from the country a%erage
for the correspon'ing year" 6e then calculate the stan'ar' 'e%iation of this measure for each
!rm" 1n the panel regressions, earnings %olatility is measure' o%er E/year o%er/lapping perio's
)200=/200+, 2002/200., """, 1*8+/1**1, as in -accio et al" )2011," 6e also show that the results
are robust to alternati%e pro<ies for !rm ris$/ta$ing"
Besi'es the global factor, we inclu'e the following control %ariables that the literature has
shown to impact managerial ris$/ta$ing )@ohn et al" )2008,, -accio et al" )2011, an' Bouba$ri
et al" )201=,,F the logarithm of total assets )Size,, the ratio 'ebt to assets )Leverage,, an'
>CB growth )JGDP, from the 1M- 6G# 'atabase," Small !rms are typically more prone
to ris$/ta$ing, whereas le%erage captures the !nancial ris$ !rms ta$e" >CB growth captures
the countryHs o%erall growth, an' lower country/le%el growth coul' be associate' with higher
earnings %olatility" 1n all speci!cations, we also a'' the mar$et/to/boo$ ratio )MTB, to control
for !rm/le%el growth opportunities" 9ll the !rm/le%el 'ata are winsorie' at the 1K le%el to
re'uce the e&ect of the outliers" 6e also use a profusion of a''itional control %ariables that
ha%e been consi'ere' in the ris$/ta$ing literature an' show that our results are robust to their
inclusion"
+
Borrowers
in A
Borrowers
in B
Borrowers
in C
Banks
in A
Banks
in B
Banks
in C
Global
Banks
Wholesale
Funding
Market
3igure 4. Structure of the global banking system.
(he resulting sample comprises up to 102,02* obser%ations of 1.,4+0 !rms from the follow/
ing .E countriesF 9rgentina, 9ustralia, 9ustria, Bahrain, Bangla'esh, Belgium, Brail, Bulgaria,
4hile, 4hina, 4olombia, 4roatia, 4yprus, 4ech 2epublic, Cenmar$, Gstonia, -inlan', -rance,
>ermany, >reece, Hong 3ong, Hungary, 1celan', 1n'ia, 1n'onesia, 1relan', 1srael, 1taly, @amaica,
@apan, 3orea, 3uwait, ?at%ia, ?ithuania, ?u<embourg, Malaysia, Malta, Me<ico, Netherlan's,
New Dealan', Norway, Ba$istan, Bapua New >uinea, Beru, Bhilippines, Bolan', Bortugal,
Latar, 2omania, 2ussian -e'eration, Sau'i 9rabia, Singapore, Slo%a$ 2epublic, Slo%enia, Spain,
Sri ?an$a, Swe'en, Switerlan', (aiwan, (hailan', (rini'a' an' (obago, (ur$ey, 0nite' 9rab
Gmirates, 0nite' 3ing'om, an' Veneuela"
-igure 1 'epicts the institutional bac$'rop to the operation of the global ban$ing system
'e%elope' in Bruno an' Shin )201=," 1n -igure 1, ban$s with access to the 0S 'ollar fun'ing
mar$et through money mar$et fun's )MM-s, in the 0nite' States channel fun'ing from 0S
!nancial mar$ets to ban$s in other parts of the worl' )'enote' as regions A, B an' C in -igure
1," (he global ban$s inclu'e 0S/'omicile' ban$s, but Shin )2012, shows that global ban$s
8
with Guropean hea':uarters were particularly acti%e in channeling 0S 'ollar fun'ing from the
0nite' States to other parts of the worl'"
Bruno an' Shin )201=, show that the interconnecte' nature of the global ban$ing system
generates spillo%er e&ects of !nancial con'itions across bor'ersF greater ease of raising wholesale
fun'ing from the center through cheaper 0S 'ollar ban$ fun'ing rates implies greater a%ailability
of fun'ing to regional ban$s, which in turn translates into more lenient len'ing con'itions to
ultimate borrowers in regions A, B, C, etc" >i%en the interloc$ing nature of global ban$ing, the
global factors that moti%ate the 'ecisions of global ban$s will 'etermine cre'it con'itions in all
locations through the institutional structure of the global ban$ing system" (he spillo%er e&ects
thus generate' mean that more accommo'ati%e cre'it con'itions associate' with global li:ui'ity
at the center lea' to lower ris$/a';uste' len'ing rates, in'ucing !rms to apply lower 'iscount
rates in their in%estment 'ecisions" -or any gi%en fun'amental cash 5ows, lower 'iscount rates
an' higher net present %alues in'uce !rms to ta$e on more in%estment pro;ects an' greater ris$"
Gmpirically, Bruno an' Shin )201=, show that the le%erage of the global ban$s at the center
of the system can ser%e as a summary statistic for the acti%ity of global ban$s in channeling
fun'ing from the center to the periphery" 1n this sense, the le%erage of the global ban$s turns
out to be a useful pro<y for the single global factor that 'etermines cre'it a%ailability to all
borrowers across all the peripheral economies" (he crucial role of le%erage of the ban$ing
system was note' in a 'omestic setting by 9'rian an' Shin )2010, 201=, in the conte<t of the
0S subprime mortgage crisis"
(he global factor in Bruno an' Shin )201=, is also associate' with a greater inci'ence of
capital 5ows through the ban$ing sector that are synchronie' across regions, as 'escribe' by
4al%o, ?ei'erman, an' 2einhart )1**=, 1**., in the conte<t of emerging economy capital 5ow
booms in the early 1**0s" 1n turn, the portfolio choice of global ban$s means that lower loan
rates for cross/bor'er len'ing also a&ect purely local cre'itor/'ebtor relationships" 1n this way,
the global factor in cre'it mar$ets impacts all borrowers, whether they are fun'e' purely from
'omestic fun's or through cross/bor'er capital 5ows"
6e follow Bruno an' Shin )201=, in using the le%erage of the 0S bro$er/'ealer sector from
*
*able 4. Summary Statistics. *his table summarizes our key variables. *heir fre$uency is annual and we
give the mean# standard deviation# minimum and maximum. %ata are for the period 4506-.//6.
7ariable Obs 8ean 'td. %ev. 8in 8ax
)ROA, 4/./.5 /./09 /.4:4 /.//9 /.0/5
;lobal <i$uidity .4 40..64 =.4>5 9.545 .0.=:4
J;lobal <i$uidity .4 /./:> /..44 -/.=/4 /.990
J;%, 4/>: /./:> /./>: -/./99 /.4:/
'ize 4/./.5 6.55: >.>9: -9.9.4 .:.4:>
<everage 4/./.5 /.9>6 /.... /././ 4.///
8*? 4/./.5 4..96 >.44: /./.: .=.=40
the -low of -un's as our pro<y for global li:ui'ity, with the reasoning being that the Guropean
global ban$s that also engage in the channeling of ban$ fun'ing will be a&ecte' by the wholesale
fun'ing con'itions that in5uence 0S bro$er 'ealers" 1n particular, both the level of ban$
le%erage )which 'etermines the rate at which a one/'ollar increase in ban$ capital is turne' into
len'ing, as well as the change in the le%erage )which 'etermines the len'ing base' on existing or
infra-marginal ban$ capital, where each 'ollar of the global ban$Hs e<isting e:uity is le%erage'
up to a higher multiple, enter as 'eterminants of global li:ui'ity" 1n our empirical in%estigation,
the %ariable Global Liquidity is the le%el of the bro$er/'ealer le%erage, while JGlobal Liquidity
refers to the growth of bro$er/'ealer le%erage, gi%en by the log 'i&erence" (able 1 reports
summary statistics of our main %ariables"
3 Empirical Findings
31 !anel Regressions for Corporate Risk"Taking
6e begin by e<amining panel regressions for the pre/crisis perio' until 200+ with country an'
in'ustry !<e' e&ects" By inclu'ing the full set of country an' in'ustry/le%el 'ummy %ariables,
we aim to account for possible country/speci!c an' in'ustry/speci!c shoc$s that may a&ect
operational an' in%estment 'ecisions" Stan'ar' errors are a';uste' for heteros$e'asticity an'
clustering at the company le%el" #ur regression e:uation isF
10
)ROA
i,(t,t+4)
, M
0
N
1
Global Liquidity
t1
N
2
JGlobal Liquidity
t
N )1,
N
1
Firm controls
i,t
N
2
Country countrols
c,t
N
NCountry F.E. N Industry F.E. N
i,t
(he $ey e<planatory %ariable for our purposes is the le%erage of the 0S bro$er/'ealer sector,
both in le%els )Global Liquidity, an' in log changes )JGlobal Liquidity," (o re'uce en'ogeneity
concerns, Global Liquidity is lagge' by one year" Because the number of !rms %aries across coun/
tries, we use weighte' regressions by the in%erse of the number of !rms from the correspon'ing
country" (able 2 reports the results of our panel regressions"
4olumns 1 to = report results from speci!cations of )ROA, compute' as the stan'ar'
'e%iation of country/year a';uste' )GB1(C9,I9ssets for each !rm" 6e see that Global Liquidity
an' JGlobal Liquidity are positi%e an' highly signi!cant )at the 1 K le%el, in e%ery speci!cation,
supporting the main hypothesis of our paper regar'ing the globaliation of corporate ris$/ta$ing
arising from the 5uctuations of global li:ui'ity o%er time" (he economic impact of global
li:ui'ity on ris$/ta$ing is noteworthy" Base' on speci!cation = in (able 2, on a%erage, a one/
stan'ar' 'e%iation increase in the bro$er 'ealer le%erage ratio )>lobal ?i:ui'ity, increases ris$/
ta$ing by 0"021 )2EK of its mean,, whereas a one/stan'ar' 'e%iation increase in the change in
le%erage )J>lobal ?i:ui'ity, increases ris$/ta$ing by 0"008 )*K of its mean,"
(his combination of !n'ings mirrors the results shown in Bruno an' Shin )201=, in the
conte<t of global factors in cre'it growth an' capital 5ows" #ur results are consistent with the
mo'el in Bruno an' Shin )201=, in that both the level of ban$ le%erage )which 'etermines the
rate at which a one/'ollar increase in ban$ capital is turne' into len'ing, as well as the change
in the le%erage )which 'etermines the len'ing base' on existing, or infra-marginal ban$ capital,
where each 'ollar of the global ban$Hs e<isting e:uity is le%erage' up to a higher multiple, enter
as 'eterminants of global li:ui'ity"
#ur results support the proposition that more accommo'ati%e cre'it con'itions associate'
with global li:ui'ity at the center is associate' with greater ris$/ta$ing by ultimate borrowers
11
*able .. Global Liquidity and Corporate Risk-Taking. *his table reports results from the panel regressions
for corporate risk-taking with country and industry xed eects. *he dependent variables are the country-
and industry-ad(usted standard deviation of &O@ -columns 4 to >1# the country-industry ad(usted standard
deviation of &O@ -column :1# the country-ad(usted standard deviation of capital expenditures -column 91 or
&A% expenditures -column =1# and the growth in capital expenditures -column 61 or in &A% expenditures
-column 01. ;lobal <i$uidity is the leverage of the B' broker-dealer sector and C;lobal <i$uidity is its annual
growth. 'ize is the logarithm of total assets# <everage is the ratio debt to assets# and 8*? is the market to
book ratio. C;%, is the annual change in ;%,. 'tandard errors are reported in parantheses and are clustered
at the rm level.
4 . > :
%ep. 7ariable )ROA, )ROA, )ROA, )ROA2,
;lobal <i$uidity /.//>4DDD /.//:4DDD /.//>9DDD /.//>=DDD
E/.///.F E/.///.F E/.///.F E/.///>F
J;lobal <i$uidity /./:4:DDD /./>64DDD /./>>>DDD
E/.//>/F E/.//>4F E/.//>0F
'ize -/.//=/DDD -/.//6/DDD
E/.///9F E/.///5F
<everage /./45>DDD /.//95
E/.//:>F E/.//=0F
8*? /.//4>DDD /.//44DDD
E/.///>F E/.///:F
J;%, -/.4::6DDD -/./0=:DDD
E/./.=>F E/./.64F
"onstant -/.//00D -/./>/9DDD /./.:.DDD /.//46
E/.//:6F E/.//9:F E/.//=5F E/.//50F
Observations 4/.#/.5 4/.#/.5 4/.#/.5 4/.#/.5
&-s$uared /./90 /./=. /./56 /./0>
G "ountries =9 =9 =9 =9
12
*able . -continued1
9 = 6 0
%ep. 7ariable )CA!E", )RO#, JCA!E" JRO#
;lobal <i$uidity /./50/DDD /.4/05DDD /./49:DDD /./4.4DDD
E/./4:/F E/./4/=F E/.//>4F E/.//:>F
J;lobal <i$uidity 4./9:6DDD 4./>5/DDD /..==5DDD /.6490DDD
E/.40>6F E/.4:00F E/./59/F E/.45/.F
'ize /.//69 -/./9>.DDD /./9=/DDD /./>50DDD
E/./44.F E/./4==F E/.//:=F E/.//=6F
<everage /.49.4 -/.>090DD -/..>66DDD -/.4=95D
E/.4=56F E/.466>F E/./:9>F E/.4///F
8*? -/.//>> /.//>= -/./46>DDD -/./.49DDD
E/.//:.F E/.//9=F E/.//:.F E/.//=0F
J;%, -..>6>9 ->.4/>9DD >..=9=DDD 4.6>09
E4.9/..F E4..5=6F E/.960:F E4..5>0F
"onstant -4.4>56DDD -/.6/65DD -/.0:.:DDD -4./.:>DDD
E/.>0>6F E/..56:F E/.4/>5F E/.4665F
Observations ==#/65 .4#.>. 4/:#==. >:#65:
&-s$uared /./96 /./05 /./> /./69
G "ountries =9 :: =9 90
at the en' of the cre'it chain in all the regions" 1n fact, our !n'ings are consistent with a
mechanism whereby greater cre'it a%ailability associate' with lower ris$/a';uste' len'ing rates
lea's !rms to apply lower 'iscount rates in their in%estment 'ecisions, so that they ta$e on more
in%estment pro;ects at lower hur'le rates of return"
1n the remaining speci!cations, we use the following alternati%e 'e!nitions of ris$/ta$ing
as robustness testsF a, the stan'ar' 'e%iation of the 'i&erence between a !rmHs 2#9 an' the
a%erage 2#9 across all !rms in the same S14 in'ustry an' from the country in which the
company is registere' ))ROA2
(t,t+4)
,, )column 4, also use' in -accio et al", 2011,P b, the stan/
'ar' 'e%iation of the 'i&erence between a !rmHs capital e<pen'iture ratio )49BGQ, compute'
as the ratio of capital e<pen'itures o%er sales, an' the country a%erage for the correspon'/
ing year ))CA!E"
(t,t+4)
,, )column E,P c, the stan'ar' 'e%iation of the 'i&erence between a
!rmHs research an' 'e%elopment ratio )2OC, compute' as the ratio of research an' 'e%elop/
ment o%er sales, an' the country a%erage for the correspon'ing year ))RO#
(t,t+4)
,, )column .,P
1=
', the log 'i&erence in capital e<pen'itures that captures the growth in corporate in%estment
)JCA!E"
(t,t+1)
, )column +,P e, the log 'i&erence in 2OC e<pen'itures )JRO#
(t,t+1)
, )column
8," 4apital e<pen'itures an' 2OC e<pen'itures are alternati%e pro<ies for corporate ris$/ta$ing
)see, e"g", 4oles, Caniel, an' Na%een, 200.P Bargeron, ?ehn, an' Dutter, 2010," 1n particular,
JCA!E"
(t,t+1)
an' JRO#
(t,t+1)
allow us to e<ten' an' use the time/series of >lobal ?i:ui'ity
up to 200+" Because of space reasons an' since the literature mainly consi'ers the stan'ar'
'e%iation of !rm pro!tability as a pro<y for ris$/ta$ing )see, e"g", @ohn et al" 2008P -accio et
al", 2011P an' Bouba$ri et al", 201=,, in the subse:uent sections we continue showing the results
for )ROA
(t,t+4)
, as our main 'epen'ent %ariable" Howe%er, our results are robust to all other
'e!nitions of ris$/ta$ing"
32 #dditional Factors
(he ris$/ta$ing literature has consi'ere' an' in%estigate' a''itional channels that a&ect the
in%estment operations an' ris$/ta$ing of !rms" 1n this section, we assess the robustness of our
results to a number of a''itional control %ariables, !nancial an' economic channels a&ecting
!rmsH operational 'ecisions" 1n most cases, 'ata are not a%ailable for the entire perio' )e"g",
ownership, an'Ior for all countries )e"g", accounting 'isclosure in'icators," 1n or'er to preser%e
the largest number of obser%ations an' countries represente' in our sample, we use a parsimo/
nious approach by a''ing 'i&erent selecte' %ariables to mo'el 1" 2esults are reporte' in (able
="
321 $i%uidit& Factors
6e start by a''ressing the possibility that global factors other than global li:ui'ity may in
principle a&ect corporate ris$/ta$ing" 1n columns 1 an' 2, we a'' the 4B#G Volatility 1n'e<
)!", an' the Moo'yHs Baa 4orporate Bon' Aiel' Sprea' )Bond S#read, a%ailable from the St
?ouis -e' -2GC website, to control for global mo%ements that may a&ect corporate !nancing
an' operational 'ecisions" Both the !" an' the Bond S#read coeRcients are signi!cant an'
with a negati%e sign, as e<pecte', meaning that higher uncertainty an' ris$ a%ersion negati%ely
14
impact ris$/ta$ing by !rms" Howe%er, Global Liquidity )both in le%els an' in changes, continues
to remain highly signi!cant in the speci!cations"
1n column =, we a'' a 'ummy that ta$es the %alue 1 after a country has implemente' the
Basel $ accor's an' 0 otherwise" Basel 2 rules re:uire a le%el of capital a'e:uate for the ban$Hs
le%erage practices an' the ris$ to which it e<poses itself through len'ing an', as a conse:uence,
such limitations coul' a&ect the a%ailable fun's to corporations through the ban$ing sector"
6e see that in'ee' the implementation of the Basel 2 rules has a negati%e impact on !rmsH
ris$/ta$ing as the !nancing a%ailable through the ban$ing channel may be force' to 'ecrease"
Aet again, Global Liquidity )both in le%els an' in changes, continues to remain highly signi!cant
in the speci!cation"
Bruno an' Shin )201=, show that the growth in the e:uity of global ban$s, especially Gu/
ropean global ban$s that were acti%e in 0S 'ollar interme'iation, is an important global 'eter/
minant of cross/bor'er capital 5ows" 6e therefore a'' the change in the total boo$ %alue of
e:uity of the largest )top 10, non/0S commercial ban$s by assets as a pro<y for the growth in
e:uity of international ban$s )Global %quity," 6e construct the series using Ban$scope 'ata,
a%ailable since 1**8" 1n a''ition to >lobal ?i:ui'ity an' >lobal G:uity, country/speci!c con'i/
tions in li:ui'ity an' e:uity of local ban$s coul' facilitate cross/bor'er ban$ len'ing an' a&ect
the !nancing a%ailable for in%estments" 9s a pro<y for local le%erage, we use the ratio of ban$
assets to capital )Local Leverage, from the 6orl' Ban$ 6C1 'atabase )a%ailable since 1**8,"
9s a pro<y for local e:uity growth, we use the commercial ban$sH net income to yearly a%erage'
total assets )2#9, )Local %quity, from the 6orl' Ban$ -inancial Ce%elopment an' Structure
Cataset" By using this pro<y, we implicitly assume that a constant fraction of the earnings is
retaine' as e:uity"
1n a''ition to !nancing through ban$s, !rms coul' resort to international capital mar$et
!nancing through cross/listing an' bon' issuance" 6e therefore a'' to mo'el 1 a 'ummy e:ual
to 1 if the !rm tra'es on 0S stoc$ e<changes through &D's an' a %ariable capturing the
amount of long/term bon's issue'" 0sing 4#MB0S(9( >lobal 'ata, we 'e!ne long/term Debt
!ssuance as the ratio of the sales of long/term 'ebt minus the purchase of long/term 'ebt, o%er
1E
lagge' total assets" -or instance, @ulio, 3im, an' 6eisbach )200+, !n' that long/maturity 'ebt
is more li$ely to !nance capital e<pen'itures"
2egressions results shown in column 4 'emonstrate that the alternati%e !nancing channels
'escribe' abo%e 'o not 'ecrease the importance of the association between >lobal ?i:ui'ity
an' corporate ris$/ta$ing" (he coeRcients of Global %quity, Local Liquidity, an' Local %quity
are positi%e an' signi!cant, as e<pecte' an' in line with the results foun' in Bruno an' Shin
)201=,, but they 'o not 'iminish the role of >lobal ?i:ui'ity" 4ross/listing through 9C2s an'
bon' issuance 'o not seem to ha%e a signi!cant impact on ris$/ta$ing by !rms" (a$en together,
these robustness chec$s 'o not point to the e<istence of a spurious relationship between >lobal
?i:ui'ity generate' by cross/bor'er ban$ing 5ows an' ris$/ta$ing by !rms"
322 Go'ernance and $egal Factors
(he e%i'ence shown in @ohn et al" )2008, an' in -accio et al" )2011, in'icates an association
between corporate go%ernance, ownership structure, an' ris$/ta$ing" 6e hereby augment mo'el
1 to test whether the relationship between >lobal ?i:ui'ity an' ris$/ta$ing is robust to the
inclusion of corporate go%ernance an' ownership aspects" -ollowing @ohn et al" )2008,, we
construct the following %ariables an' inclu'e them in mo'el 1F
-irms with a large sharehol'er may in%est more conser%ati%ely than wi'ely/hel' ones" (he
Large Shareholder ownership %ariable is 'eri%e' from Bureau Van Ci;$Hs #siris 'atabase
)'ata a%ailable since 1***," -or each year, we retrie%e the ownership of the largest cash
5ow rights hol'er on the sharehol'er list" 1f the largest sharehol'erHs sta$e is less than 20K,
we co'e the ownership %alue as ero" 6e also measure insi'er 'ominance by the a%erage
fraction of !rmsH stoc$ mar$et capitaliation hel' by insi'ers )!nsiders, from 6orl'scope,"
4ompetition may contribute to higher %olatility in !rm pro!ts" 6e control for (om#etition
across countries as pro<ie' by the Her!n'ahl in'e<, 'e!ne' as the sum of the s:uare'
shares of !rm sales to total sales within a gi%en country" 1nter%entionist go%ernments
may press corporations to a%oi' ris$y in%estments to protect their %este' interest in the
1.
*able >. Global Liquidity and Corporate Risk-Taking - Robustness Tests. *his table reports results
from the panel regressions for corporate risk-taking. *he dependent variable is the country-ad(usted standard
deviation of &O@. ;lobal <i$uidity is the leverage of the B' broker-dealer sector and C;lobal <i$uidity is its
annual growth. @ll the specications include the following control variables! 'ize# <everage# 8*? and ;%,
growth. "olumn 4 includes the "?OH 7olatility Index -7IJ1. "olumn . includes the 8oody2s ?aa "orporate
?ond 'pread. "olumn > includes a dummy e$ual to 4 after a country has adopted ?asel . accords. "olumn :
includes the growth in the book value of ;lobal H$uity# the ratio of country-level bank assets to capital -<ocal
<everage1# the country-level <ocal H$uity growth# a dummy e$ual to 4 if a rm has @%&s# and the ratio of long-
term debt over total assets. "olumns 9 to 0 include additional control variables to capture the level of country
investor protection -the )eritage "orruption Index# the I"&; <aw and Order Index# the "I3@& %isclosure
Index1# ownership concentration -the existence of a large shareholder# the fraction of stock market capitalization
held by insiders1# competition# and government expenditures. In "olumn 5# ;lobal <i$uidity is interacted with
a dummy e$ual to 4 if a country has high levels of capital inows -;lobal "ountry1. 'ee 'ection >.. for a
description of all the variables. 'tandard errors are reported in parantheses and are clustered at the rm level.
4 . > :
;lobal <i$uidity /.//>9DDD /.//.0DDD /.//>=DDD /.//4=DDD
E/.///.F E/.///>F E/.///.F E/.///>F
J;lobal <i$uidity /./.49DDD /./.:6DDD /./>65DDD /./>5/DDD
E/.//>9F E/.//::F E/.//>.F E/.//94F
"ontrols K K K K
@dditional controls!
7IJ -/./4=>DDD
E/.//./F
?ond 'pread -/.//==DDD
E/.//44F
?asel . -/.//.0D
E/.//46F
%ebt Issuance /.//.:
E/./:95F
@%& /.////
E/.//>:F
;lobal H$uity /.//5=DDD
E/.///5F
<ocal <i$uidity /.//.:DDD
E/.///=F
<ocal H$uity /.//.=DD
E/.//4>F
"onstant /./64.DDD /./940DDD /./...DDD /./04=DDD
E/.//0.F E/.//0.F E/.//=5F E/.//54F
Observations 4/./.5 00>0/ 4/./.5 65099
&-s$uared /.4/4 /./09 /./56 /./5/
G "ountries =9 =9 =9 99
1+
*able > -continued1
9 = 6 0 5
;lobal <i$uidity /.///0D /.//>/DDD /.//>0DDD /.//4=DDD /.//>>DDD
E/.///9F E/.///>F E/.///>F E/.///:F E/.///>F
J;lobal <i$uidity /./459DDD /./>/0DDD /./:>0DDD /./.=0DDD /./>9/DDD
E/.//=:F E/.//9>F E/.//:4F E/.//=4F E/.//9:F
"ontrols K K K K K
@dditional controls!
"orruption /.//// /.///=DDD /.///:DDD
E/.///.F E/.///4F E/.///4F
<arge shareholder -/.//4:
E/.//..F
Insiders -/.///4DD
E/.////F
"ompetition -/.//6: /./4./ -/.4/6/DDD -/.4/4>DDD
E/./4//F E/.//6=F E/./4/:F E/./4:5F
;ov. Hxpenditures /.///. /.///:DDD /.///=DDD /.///9DDD
E/.///.F E/.///4F E/.////F E/.////F
%isclosure /.///9DDD
E/.///.F
<aw and Order /.//94DDD
E/.//4.F
;lobal <i$uidityD;lobal "ountry /.////
E/.///4F
J;lobal <i$uidityD;lobal "ountry /./4/9D
E/.//9=F
"onstant /./0/4DDD /./4>9 -/./::/DD /./.44 /./.0:DDD
E/./459F E/./4>=F E/./400F E/./49.F E/.//66F
Observations ./4.5 =4695 0>9/9 5:99. 5..=:
&-s$uared /.44> /./0. /..>/ /.4=> /./05
G "ountries =. 96 >: =: =:
18
company" 6e thus use Government %x#enditures as a percentage of >CB to capture the
'egree to which a go%ernment is inter%entionist"
4orporate ris$/ta$ing has been foun' to be positi%ely relate' to the :uality of in%estor
protection" (o characterie in%estor protection in each country, we use three measuresF
the :uality of accounting 'isclosure stan'ar's )Disclosure, constructe' from the 41-92
1n'e<, a%ailable for =4 countries in our sample,, the La) and *rder 1n'e< )from 142>,,
an' the +reedom from (orru#tion 1n'e< )a 10 point score from the Heritage -oun'ation
in which 10 in'icates %ery little corruption,"
4olumns E to 8 of (able = show that our results are not a&ecte' by the inclusion of the
abo%e %ariables" Since the country/le%el 'ummy Disclosure is time/in%ariant an' the country/
le%el %ariable La) and *rder changes little o%er time, speci!cations + an' 8 are run without
country !<e' e&ects to a%oi' multicollinearity issues" (urning to the other regressors, we see
that the coeRcient of Large Shareholder is not signi!cant )column E,, whereas insi'ers ha%e a
lower attitu'e to ris$ in the companies they control )column .," ?ess corruption )columns . an'
+,, better accounting 'isclosure )column +,, an' a strong legal system )column 8, are positi%ely
associate' with corporate ris$/ta$ing" #%erall, these results are consistent with the e%i'ence
foun' in @ohn et al" )2008, that corporate ris$/ta$ing is positi%ely relate' to the :uality of
in%estor protection, but they 'o not in'icate the e<istence of a spurious relationship between
>lobal ?i:ui'ity an' ris$/ta$ing by !rms"
323 Countr& Reliance on Global Factors
1n the last speci!cation of (able =, we in%estigate whether countries with less globalie' ban$ing
sectors are less a&ecte' by >lobal ?i:ui'ity" 6e collect the claims of B1S/reporting ban$s on
counterparties in a particular country as gi%en by the B1S ?ocational Statistics (able +9 to
capture the magnitu'e of ban$ing 5ows in a country" 6e then 'i%i'e the claims by >CB
an' construct a 'ummy Global (ountry that ta$es the %alue 1 if a country falls abo%e the
E0th percentile an' 0 otherwise" (he 'ummy Global (ountry captures those countries with a
1*
higher e<posure to !nancial globaliation" 6e then interact the 'ummy Global (ountry with
Global Liquidity )both in le%els an' changes," 4olumn * shows that the coeRcient of the
interaction term JGlobal Liquidity,Global (ountry is positi%e an' signi!cant, meaning that
!rms in countries with higher capital in5ows generate' by global ban$s are more a&ecte' by a
change in global li:ui'ity than countries with lower capital 5ows" Ne%ertheless, the coeRcients
of the lone %ariables Global Liquidity an' JGlobal Liquidity continue to remain positi%e an'
signi!cant"
32( )ultinational corporations
Much of the tra'itional !nance/base' literature on international in%estments posits a 'i%ersi!ca/
tion bene!t that lea's to lower ris$" 1n a similar %ein, early international business literature on
multinational corporations )MN4s, suggests the e<istence of a 'i%ersi!cation bene!t for MN4s
that lowers ris$" 9s MN4s are more 'i%ersi!e' relati%e to 'omestic companies, the returns of
MN4s will be less correlate' with the mar$et an' systemic ris$ will be lower" Howe%er, subse/
:uent research by 2eeb, 3wo$, an' Bae$ )1**8, an' 3wo$ an' 2eeb )2000, !n's that !rm ris$
is positi%ely relate' to internationaliation" Speci!cally, 2eeb, 3wo$, an' Bae$ )1**8, !n' that
MN4s may increase their systematic ris$ 'ue to an increase in the stan'ar' 'e%iation of cash
5ows from internationaliation, which o&sets the lower correlation 'eri%ing from 'i%ersi!cation"
(he e%i'ence shown in this paper reinforces the i'ea that an increase in international in%est/
ment connections raises ris$ because co/mo%ements across countries are reinforce' by a greater
cross/bor'er connecte'ness"
6e hereby further 'e%elop this argument by e<amining whether MN4s ha%e a 'i&erent le%el
of corporate ris$/ta$ing an' systematic ris$ from 'omestic !rms" -ollowing 2eeb et al" )1**8,,
we use the foreign asset ratio to measure the 'egree of internationaliation" 6e 'ownloa' 'ata
on geographic segment assets from Bureau Van Ci;$Hs #siris 'atabase, an' we compute the
ratio of foreign assets 'i%i'e' by total assets" 6e then create the 'ummy %ariable M-(s, which
ta$es the %alue 1 if a !rm has a foreign asset ratio abo%e the sample tercile an' 0 otherwise,
an' interact it with our >lobal ?i:ui'ity %ariables"
20
*able :. Multinational Companies and Risk-Taking. *his table reports results from the panel regressions
for corporate risk-taking with country and industry xed eects. *he dependent variable is the country-ad(usted
standard deviation of &O@ -"olumns 4# .# and >1 or rm ?eta -"olumns : and 91. ;lobal <i$uidity is the
leverage of the B' broker-dealer sector and C;lobal <i$uidity is its annual growth. 8L"s is a dummy variable
that takes the value 4 if a rm has a foreign asset ratio above the tercile and / otherwise. @ll the specications
include the following control variables! 'ize# <everage# 8*?# and ;%, growth.
4 . > : 9
%ependent 7ariable )&O@, )&O@, )&O@, ?eta ?eta
;lobal <i$uidity /.//..DDD /.//.0DDD /.//40DDD /./4/:D /./455DD
E/.///9F E/.///9F E/.///9F E/.//9=F E/.//04F
;lobal <i$uidity D 8L"s /.//4=DD -/./49=
E/.///6F E/./4:>F
J;lobal <i$uidity /./.6/DDD /./.0:DDD /././0DDD /..0:9DDD /.>///DDD
E/.//=0F E/.//64F E/.//66F E/.4/>>F E/.4490F
J;lobal <i$uidity D 8L"s /./4/0 -/./466
E/.//50F E/..4:6F
8L"s -/./.65DD /..64>
E/./4:/F E/..64>F
'ize -/.//9/DDD -/.//9=DDD -/.//9.DDD -/./4>5 -/./4>4
E/.//44F E/.//4.F E/.///0F E/./..9F E/./..>F
<everage /./495DD /./4: /./4.0D -/..>/0DD -/..:>6DDD
E/.//64F E/.//5/F E/.//=6F E/./5>4F E/./5>>F
8*? /.///> /.//4:DDD /.//4.DDD /.//99 /.//96
E/.///>F E/.///9F E/.///>F E/.//96F E/.//96F
J;%, -/./09> -/...55DDD -/.40>>DDD /.49== /.4/.9
E/./694F E/./=9.F E/./=44F E/.59=0F E/.56/.F
"onstant /./==5DDD /./:9.DDD /./946DDD /.4694 /./.09
E/./45>F E/./49>F E/./4.6F E/..>=.F E/..59>F
Observations 4>#96: 4=#494 .5#6.9 .5#6.4 .5#6.4
&-s$uared /./5: /.4/6 /./00 /./=: /./==
Lumber of countries 9/ 96 90 90 90
'ample non-8L"s 8L"s @ll @ll @ll
21
6e start by in%estigating whether MN4s ha%e a 'i&erent propensity for corporate ris$/ta$ing
than 'omestic !rms" (able 4, shows that higher >lobal ?i:ui'ity )both in le%el an' change, is
associate' with greater corporate ris$/ta$ing for both the subsample of non/multinational !rms
)column 1, an' multinational !rms )column 2," Aet, column = shows that >lobal ?i:ui'ity
)in le%el, has a greater impact on earnings %olatility for MN4s than for non/MN4s" (his is
consistent with our premise that higher a%ailability of li:ui'ity is a global factor that increases
cross/bor'er connecte'ness, resulting in a larger impact on corporate operations of MN4s"
6e further e<ploit the aspect of internationaliation by in%estigating its relation with sys/
tematic ris$" 0sing 'ata from 4ompustat >lobal Security 'atabase, we construct the Beta of
each !rm for each year" Beta is calculate' using monthly return 'ata on a E/year rolling win'ow
an' winsorie' at the 1K le%el to re'uce the e&ect of outliers" (he monthly mar$et return use'
is MS41/6orl' 1n'e< 6e then use Beta as 'epen'ent %ariable in lieu of )ROA, in e:uation
1" (able 4, column 4, shows that >lobal ?i:ui'ity is relate' to an increase in systematic ris$"
Howe%er, >lobal ?i:ui'ity 'oes not seem to ha%e a 'i&erent incremental impact on the beta of
MN4s )column E," (a$en together, the results suggest that >lobal ?i:ui'ity increases earnings
%olatility with an e&ect that at the margin is bigger for MN4s than non/MN4s, an' it also
increases ris$" 1n particular, such an increase in ris$ for MN4s is not o&set by the ris$ re'uction
'ue to international 'i%ersi!cation"
( Endogeneit&
Broblems of en'ogeneity are a familiar an' per%asi%e feature in the corporate !nance an' inter/
national business literature, as recently emphasie' by 2eeb, Sa$a$ibara, an' Mahmoo' )2012,"
1n the absence of appropriate instruments for global li:ui'ity, we attempt to a''ress the en'o/
geneity problem more fully in two ways" (he !rst is by using the 2a;an an' Dingales )1**8,
'i&erence/in/'i&erence approach that loo$s at the intrinsic 'epen'ency on e<ternal !nance as
a pro<y for the 'egree of li:ui'ity constraints face' by companies, an' the secon' is to use the
'ynamic >MM metho's outline' in 9rellano an' Bo%er )1**E," 6e tac$le each of these in turn"
22
(1 E*ternal Financial Dependence
#ur !rst test rests on the premise that in'ustries that are more 'epen'ent on e<ternal !nance
bene!t more from greater cre'it a%ailability" 1n the presence of greater a%ailability of cre'it,
those !rms that rely more on e<ternal !nance will be able to bene!t more from the permissi%e
!nancial con'itions" 4onse:uently, those !rms that are more reliant on e<ternal !nancing shoul'
show greater sensiti%ity in their ris$/ta$ing 'ecisions to 5uctuations in global li:ui'ity because
greater a%ailable li:ui'ity woul' alle%iate more their !nancial an' in%estment constraints"
(o test this hypothesis, we e<amine the sensiti%ity of corporate in%estment 'ecisions to global
li:ui'ity by following the metho'ology of 2a;an an' Dingales )1**8, of formulating an in'e<
of e<ternal !nancial 'epen'ence measure' by the fraction of in%estment not !nance' through
retaine' earnings" #ur 'ata series for e<ternal !nancial 'epen'ent in'e< )+inDe#, come from
(ong an' 6ei )2011,, who up'ate the original 2a;an an' Dingales )1**8, in'e< for the perio'
1**0/200. an' at the =/'igit S14 sector/le%el" (he in'e< is base' on 0S !rms un'er the
assumption that e<ternal 'epen'ence re5ects technological characteristics of the in'ustry that
are relati%ely stable )see 2a;an an' Dingales )1**8, for more 'etails on the metho'ology,"
6e interact the +inDe# in'e< with Global Liquidity an' JGlobal Liquidity, an' both the
in'e< alone an' the interaction terms enter as e<planatory %ariables into our panel regression,
which this time 'oes not inclu'e in'ustry 'ummies for collinearity reasons" Stan'ar' errors
are again a';uste' for clustering at the !rm/le%el" #ur speci!cation is gi%en by the following
e:uationF
)ROA
i,(t,t+4)
, M
0
N Fin#$%
k
N
N
1
Global Liquidity
t1
N
2
Global Liquidity
t1
Fin#$%
k
N
N&
1
JGlobal Liquidity
t
N &
2
JGlobal Liquidity
t
Fin#$%
k
N'Controls
i,t,c,k
N Country F.E. N
i,t
)2,
(he hypothesis is that the coeRcients
2
an' &
2
of the interaction terms +inDe#,Global
2=
Liquidity an' +inDe#, JGlobal Liquidity are positi%e, in'icating that global li:ui'ity has a
relati%ely bigger impact on !rms belonging to in'ustries that 'epen' more hea%ily on e<ternal
!nance" 1n a''ition to Size, Leverage, MTB an' GDP growth, we a'' an in'e< of a !rmHs
sensiti%ity to a contraction in consumer 'eman' )Demand Sensitivity," (ong an' 6ei )2008,
propose such an in'e< at the sector le%el base' on the stoc$ price reactions of the !rms in that
sector to the September 11, 2001, terrorist attac$" (ong an' 6ei )2008, show that this in'e<
re5ects the sensiti%ity of a !rmHs stoc$ price to an une<pecte' shoc$ in consumer 'eman' which
is not contaminate' by a !rmHs sensiti%ity to li:ui'ity shoc$s or other factors" 6e therefore a''
this %ariable to control for an in'ustryHs instrinsic sensiti%ity to aggregate 'eman' an' business
opportunities in a''ition to the !rm/le%el business opportunities pro<ie' by the mar$et/to/boo$
ratio"
(he results in (able E, column 1 show that the coeRcients of the interaction terms +inDe#,Global
Liquidity an' +inDe#,JGlobal Liquidity are in'ee' positi%e an' signi!cant" (his e%i'ence
supports our hypothesis on the role of global li:ui'ity in corporate ris$/ta$ing, bolstering our
benchmar$ set of panel regressions in (able 2"
(he 'i&erence/in/'i&erence metho'ology of mo'el 2 alle%iates to some 'egree the concern of
simultaneity biases in the relationship between !rm in%estment 'ecisions an' cre'it a%ailability"
Howe%er, it 'oes not entirely a''ress some possible omitte' %ariable biases" -or instance, the
in%estment beha%ior of !rms has been foun' to be relate' to !nancial 5e<ibility an' constraints
face' by in'i%i'ual !rms )3aplan an' Dingales, 1**+," 6e therefore construct the 3aplan an'
Dingales in'e< of !nancial constraints as further 'e%elope' by ?amont, Bol$, an' Saa/2e:ue;o
)2001, )+in(onstr, for the perio' 1*8+/200+" 9 higher in'e< in'icates that !rms are facing
higher !nancial constraints" 6e interact +in(onstr with >lobal ?i:ui'ity an' a'' it to our
speci!cation" 4olumn 2 shows that in'ee' a greater change in a%ailable li:ui'ity rela<es !rmsH
!nancial constraints, incenti%iing !rms to un'erta$e ris$ier corporate in%estments" (his result
corroborates our earlier e%i'ence using -inCep as a pro<y"
(he literature has 'e%elope' a''itional measures of !nancial constraints" -or instance, Bec$
et al" )2008, !n' that an in'ustry may ha%e 'i&erent !nancial constraints 'epen'ing on its
24
*able 9. !ternal "inancial #ependence and GMM. "olumns 4 to : present results from the &a(an
and Mingales -45501 dierence-in-dierence methodology. 3in%ep is the external nancial dependent index for
each >-digit 'I" sector over the period 455/-.//= as updated by *ong and Wei -./441. ;lobal <i$uidity is the
leverage of the B' broker-dealer sector and C;lobal <i$uidity is its annual growth. %emand 'ensitivity is an
index capturing a rm2s sensitivity to a contraction in consumer demand as dened by *ong and Wei -.//01.
3in"onstr is an index of nancial constraints as dened by aplan and Mingales -45561. 'mall 3irm 'hare is the
share of employment in rms with less than ./ employees in the B' as dened by ?eck et al. -.//01. ?usiness
Opportunities is the median of real sales growth by industry as dened by 3isman and <ove -.//61. "olumn 9
reports results from a dynamic ;88 system estimation due to @rellano and ?over -45591. @ll the specications
include the following control variables! 'ize# <everage# 8*? and ;%, growth. "luster-ad(usted standard errors
are reported in parantheses.
4 . >
3in%ep -/./4/0DDD -/./4/=DDD -/.//50DD
E/.//>0F E/.//>5F E/.//>5F
;lobal <i$uidity /.//>9DDD /.//>9DDD /.//>.DDD
E/.///.F E/.///.F E/.///>F
J;lobal <i$uidity /./>00DDD /./>=/DDD /./>5/DDD
E/.//>4F E/.//>4F E/.//:=F
3in%epD;lobal <i$uidity /.///6DDD /.///6DDD /.///6DDD
E/.///.F E/.///.F E/.///.F
3in%epDJ;lobal <i$uidity /.//=9DD /.//=.D /.//95D
E/.//>4F E/.//>>F E/.//>4F
J;%, -/.4:6:DDD -/.4:>4DDD -/.49/6DDD
E/./.0/F E/./.04F E/./.65F
'ize -/.//90DDD -/.//90DDD -/.//96DDD
E/.///9F E/.///9F E/.///9F
<everage /./499DDD /./4:9DDD /./4:9DDD
E/.//:=F E/.//:=F E/.//:=F
8*? /.//4:DDD /.//4.DDD /.//4:DDD
E/.///>F E/.///>F E/.///>F
%emand 'ensitivity /.//5/ /.//05 /.//50
E/.//09F E/.//09F E/.//0=F
3in"onstrD;lobal <i$uidity /.///4
E/.///4F
3in"onstrDJ;lobal <i$uidity /.//96DDD
E/.//.4F
3in"onstr -/.//.>
E/.//./F
'mall 3irm 'hareD;lobal <i$uidity /.////
E/.////F
'mall 3irm 'hareDJ;lobal <i$uidity -/.///4
E/.///>F
'mall 3irm 'hare -/.///=
E/.///9F
"onstant /./>:6DDD /./>95DDD /./::=DDD
E/.//=>F E/.//=>F E/.//0.F
Observations 05#9>9 05#9/= 0:#6=.
&-s$uared /./69 /./66 /./6:
G "ountries =9 =9 =9
2E
*able 9 -continued1
: 9
3in%ep -/./4.6DDD
E/.//:6F
;lobal <i$uidity /.//>4DDD /.//>0DD
E/.///6F E/.//45F
J;lobal <i$uidity /./>:.DDD /../>>DD
E/.//06F E/.4/>=F
3in%epD;lobal <i$uidity /.///5DDD
E/.///>F
3in%epDJ;lobal <i$uidity /./44.DDD
E/.//>5F
J;%, -/.4//.DDD -/..=/=
E/./.=9F E/.>4:9F
'ize -/.//=9DDD -/.//::
E/.///6F E/.//0=F
<everage -/.//04 /./>4>
E/.//=6F E/./.6=F
8*? /.//44DDD /.//>5DDD
E/.///:F E/.//4>F
%emand 'ensitivity -/.//96
E/./4/=F
?usiness opportunitiesD;lobal li$uidity /.//::
E/.//6:F
?usiness opportunitiesDJ;lobal li$uidity -/./:94
E/.4/=.F
?usiness opportunities /./056
E/.4:./F
Harnings volatility
t1
/.555/DDD
E/..06=F
Harnings volatility
t2
-/./=64
E/..9=>F
"onstant /./>54DDD -/./:5:
E/./4.6F E/.44:0F
Observations 05#9>9 69#65=
&-s$uared /./>9
G "ountries =9 =>
@&-41 /./9/
@&-.1 /.00=
)ansen test /.4.6
2.
8technological8 !rm sie" -isman an' ?o%e )200+, also argue that the !nancial/'epen'ence
%ariable +inDe# really pro<ies for 'i&erential growth opportunities" 9s in Bec$ et al" )2008,,
we measure an in'ustryHs 7technological8 composition of small !rms relati%e to large !rms as
the share of employment in !rms with less than 20 employees in the 0nite' States )obtaine'
from the 0S 4ensus )Small +irm Share,," 9s in -isman an' ?o%e )200+,, we measure economic
prospects by the me'ian of real sales growth by in'ustry )Business *##ortunities, compute'
o%er the perio' 1*8+/200+" 6e then interact Small +irm Share an' Business *##ortunities
in'icators with Global Liquidity )both in le%els an' changes, an' a'' them to our mo'el 2"
4olumns = an' 4 show that our main e%i'ence on >lobal ?i:ui'ity is robust to the inclusion of
other measures of !nancial constraints"
(2 D&namic !anel G))
6e complement the 'i&erence/in/'i&erence tests by ta$ing a'%antage of the panel structure
of our 'ataset an' con'uct more formal 'iagnostic tests for en'ogeneity using the 'ynamic
panel >eneralie' Metho' of Moments )>MM, metho's from 9rellano an' Bo%er )1**E," 9s
'iscusse' in 6into$i et al" )2012,, an important aspect of the metho'ology is that it relies on a
set of 7internal8 instruments, i"e", past %alues of Global Liquidity an' !rm earnings %olatility as
instruments for current realiations of earnings %olatility" (his eliminates the nee' for e<ternal
instruments )see 6into$i et al" )2012, for more 'etails,"
6e use the panel >MM estimator to control for the 'ynamic nature of the relationship
between global li:ui'ity an' corporate ris$/ta$ing" (he 'ynamic system >MM of choice uses
a stac$e' system consisting of both !rst/'i&erence' an' le%el e:uations that assumes that all
%ariables in mo'el 1 are en'ogenous" 6e inclu'e two lags of the 'epen'ent %ariable in the
'ynamic system"
1n or'er to use the 'ynamic >MM system, we !rst nee' to pass the following tests" (he
system re:uires !rst )92)1,,, but not secon'/or'er )92)2,,, serial correlation an' to pass the
Hansen @ test of o%er/i'entifying restrictions" 6e a%oi' o%er!tting an' instrument proliferation
by using one lag )the secon' lag, an' combining instruments into smaller sets" (able E, column
2+
E, gi%es the results of the 'ynamic panel >MM regressions" (he 92)1, tests yiel' a p/%alue
of 0"0E0" (he 92)2, tests yiel' a p/%alue of 0"88., which means that we cannot re;ect the null
hypothesis of no secon'/or'er serial correlation" (he results also re%eal a Hansen @/statistic of
o%eri'enti!cation with a p/%alue of 0"12+, an' as such, we cannot re;ect the hypothesis that
our instruments are %ali'" Moreo%er, column E in (able E shows that our Global Liquidity
%ariables continue to be signi!cant e%en in the system >MM speci!cation" 4onsi'ering all the
other control %ariables, it is interesting to obser%e that only the coeRcient of M(B continues to
remain signi!cant"
2
(a$en together, the results in (able E are supporti%e of our main hypothesis, gi%e us some
assurance that the potential problems 'ue to en'ogeneity, omitte' %ariables, an' re%erse causal/
ity 'o not un'ermine our main conclusions 'rawn from our panel regressions, an' con!rm the
role of li:ui'ity pro%i'e' by global ban$s in 'ri%ing corporate ris$/ta$ing"
+ Global $i%uidit& and Crises
+1 Global Financial Crises
1n the prece'ing analysis, we ha%e e<clu'e' the post/200+ great !nancial crisis perio' because the
crisis e%ent presents particular challenges that may confoun' the e%i'ence on the 'eterminants
of corporate ris$/ta$ing" Gn'ogeneity problems are another reason for e<clu'ing the crisis
perio'" Since 0S bro$er/'ealer le%erage is our pro<y for global li:ui'ity an' the 200+/200*
!nancial crisis was a global crisis, two e&ects may be ;ointly 'etermine'" -ollowing ban$sH
'ele%eraging, the 0S bro$er/'ealer le%erage ratio collapse' 'ramatically by more than half after
200+ as the !nancial crisis gathere' pace an' the worl' economy was thrown into recession"
(he years after 200+ thus fall un'er a 'i&erent regime, an' it is one that we may e<ploit in
or'er to propose another test of our main hypothesis on the role of global li:ui'ity in 'ri%ing
2
;iven the high number of observations and the size of the matrix# the estimation of the system ;88 is
computationally intensive and could not be performed by standard computers. "omputing resources used for
this work were provided by the @merican Bniversity )igh ,erformance "omputing 'ystem# which is funded in
part by the Lational 'cience 3oundation -?"'-4/>5:561.
28
corporate ris$ ta$ing"
6e ha%e seen that the pre/crisis perio' shows strong e%i'ence of global li:ui'ity 'ri%ing
increase' corporate ris$/ta$ing" Howe%er, cross/bor'er ban$ing sector 5ows, while potentially
bene!cial, coul' also increase a !rmHs %ulnerability to crisis" (ong an' 6ei )2011, !n' that the
'ecline in stoc$ prices was more se%ere for !rms that are more 'epen'ent on e<ternal !nance"
1mportantly, they !n' that pre/crisis e<posure to non/-C1 capital in5ows )foreign portfolio an'
ban$ len'ing, worsene' the cre'it crunch"
1n the same spirit, we can as$ how 'i&erent were !rmsH e<periences to the !nancial crisis
an' the re%ersal of capital 5ows" 1s there any systematic relationship between the e<tent of
the e<posure to global li:ui'ity in the pre/crisis perio' an' the subse:uent ris$/ta$ing beha%ior
of the !rm in the post/crisis perio'S 6hich !rms were more a&ecte' by the !nancial crisis
an' the li:ui'ity crunch that resulte'S 1n a''ressing these :uestions, we can gain insights into
the potential 'ownsi'e to e<posure to global li:ui'ity" 1n other wor's, ha%ing establishe' the
potentially bene!cial nature of global li:ui'ity for higher corporate ris$/ta$ing 'uring normal
times, we now in%estigate the potential negati%e e&ects resulting from a su''en retrenchment
of cre'it a%ailability"
(o answer these :uestions, we implement a similar metho'ology to the one use' in (ong an'
6ei )2011, an' 4laessens, (ong, an' 6ei )2012," 6e !rst measure a !rmHs pre/crisis ten'ency
to ris$/ta$ing by computing the country/a';uste' %olatility of !rm/le%el earnings calculate',
as before, as the stan'ar' 'e%iation of the country/a';uste' 2#9 for each !rm in the E years
prece'ing the crisis )!r$ )ROA,," 6e then interact the pre/crisis ris$/ta$ing ten'ency with the
+inDe# in'e< of !nancial 'epen'ence" (hen, Fin#$%, !r$ )ROA, an' their interaction term
enter as e<planatory %ariables in a regression where the 'epen'ent %ariable is either the a%erage
2#9 )!ost ROA, or the stoc$ mar$et returns )!ost (toc) R$t, in the post/crisis perio'"
(he basic rationale of such an approach is that !rms more 'epen'ent on e<ternal !nance
for in%estment are most susceptible to cre'it freees" Such !rms may su&er se%ere losses on
in%estments at the onset of the crisis" By loo$ing at the companiesH sectorial nee' for e<ternal
!nancing an' their pre/crisis beha%ior, our approach woul' also su&er less from the usual en'o/
2*
geneity concerns an' allow us to e<amine the se%erity of the cre'it crunchHs impact" Speci!cally,
we run the following #?S speci!cationF
!ost )ROA
i,t
or (toc) R$t
i,t
, M
0
N
1
Fin#$%
k
N
N
2
Fin#$%
k
!r$ )ROA,
i,t
N !r$ )ROA,
i,t
N'Controls
i
N Country F.E. N
i
)=,
Stoc$ price 'ata, total return in'e<, an' a';ustment factors are retrie%e' from 4ompustat
>lobal )Security Caily," 1n a''ition to the control %ariables Size, Leverage, MTB. an' Demand
Sensitivity 1n'e< as control %ariables, we use the !rm Beta in the speci!cation with stoc$ mar$et
returns as the 'epen'ent %ariable" (he speci!cation with stoc$ mar$et returns as 'epen'ent
%ariable thus inclu'es the three -ama/-rench factors )sie, mar$et/to/boo$ ratio an' beta," (he
!rm/le%el mar$et Beta is base' on the correlation between monthly !rm stoc$ price an' the
respecti%e country/le%el mar$et in'e< o%er the past !%e years" (he regression speci!cation has
now a cross/sectional 'imension with stan'ar' errors that are cluster/a';uste' at the in'ustry
le%el"
1n a''ition to the great !nancial crisis of 200+/200*, the NBG2 i'enti!es another perio' of
global recession after the internet bubble burst in 2001 that le' to a 'ecline in the stoc$ mar$ets
for the following two years" 6e therefore apply our analysis to two global crises perio'sF post/
2001 an' post/200+" 9s in (ong an' 6ei )2011,, we compute the log 'i&erence of stoc$ price
o%er the perio' from the en' of @uly 200+ to the en' of Cecember 2008 )!ost (toc) R$t
2007
,"
-or the post/internet bubble perio', we compute the log 'i&erence of stoc$ price o%er the perio'
from the en' of -ebruary 2001 to the en' of #ctober 2001 )!ost (toc) R$t
2001
," (he post/crisis
a%erage 2#9 co%ers the perio' 2008/2010 )!ost ROA
2007
, an' the perio' 2002/2004 )!ost
ROA
2001
," (he pre/crisis %olatility of 2#9 spans o%er the perio' 200=/200+ )!r$ )ROA,
2007
,
an' o%er the perio' 1**+/2001 )!r$ )ROA,
2001
,"
3
3
*he variable Post ROA
2007
has an average of ../=N# and the variable Pre -ROA1
2007
has an average of
/..>. *he variable Post ROA
2001
has an average of ..0=N# and the variable Pre -ROA1
2001
has an average of
=0
*able =. Corporate Risk-Taking and Global Crises. *hese tables report results from O<' regressions
with country xed eects pertaining the period of the .//6-.//5 ;reat 3inancial "risis and the .//4 period of
the Internet ?ubble. ,anel @ reports results for the entire sample# ,anel ? reports results for multinational
rms -8L"s1 versus non-multinational rms -non-8L"s1. ,re &O@ is the standard deviation of the country-
ad(usted &O@ for each rm in the 9 years preceding the crisis period. 3in%ep is the external nancial dependent
index for the period 455/-.//= and for each >-digit 'I" sector as updated by *ong and Wei -./441. ;lobal
<i$uidity is the leverage of the B' broker-dealer sector and C;lobal <i$uidity is its annual growth. %emand
'ensitivity is an index capturing a rm2s sensitivity to a contraction in consumer demand as dened by *ong
and Wei -.//01. 8L"s -non-8L"s1 is a dummy that takes the value 4 if a rm is -is not1 a multinational# and
/ otherwise. @ll the specications include the following control variables! 'ize# <everage# and 8*?. In columns
4 to > and 9 to 6 -,anel @1# the dependent variable is the average &O@ in the post-crisis period# whereas in
columns : and 0# the dependent variable is the log dierence of stock price in the post-crisis period. 'tandard
errors are reported in parantheses and are clustered at the industry sector level.
,anel @
4 . > :
,ost .//6
%ependent 7ariable &O@ &O@ &O@ 'tock &eturn
3in%ep -/./4/.DDD /.//.0D /.//0.
E/.//49F E/.//46F E/./444F
3in%epD ,re -&O@1 -/.4/:.DDD -/.4/..DDD -/./955DDD
E/.//5.F E/.//00F E/./4=4F
'ize /./45/DDD /./469DDD /./40>DDD -/.//6=
E/.//.9F E/.//.4F E/.//.>F E/.//55F
8*? /.//.0DD /.//>4DDD /.//.9DDD -/./.09DDD
E/.//44F E/.//44F E/.///5F E/.//=:F
<everage -/./>/.D -/./>/>D -/./:99DDD -/..0.9DD
E/./49:F E/./49=F E/./49/F E/.4/59F
?eta -/./.55
E/./.0>F
%emand 'ensitivity -/./:40 -/./::.D -/.:==.DD
E/./.6/F E/./.9/F E/.459.F
,re -&O@1 -/.//4:D -/.//4.D -/.//::DDD
E/.///6F E/.///6F E/.//4:F
"onstant -/./=/5DDD -/./9>:DD -/./.:> -4.:95/DDD
E/./.>4F E/./.40F E/././>F E/..069F
Industry 3ixed Hects no no yes no
Observations 44#:95 44#:95 44#:95 4/#65.
&-s$uared /...: /..00 /.>94 /..0
=1
*able =# ,anel @ -continued1
9 = 6 0
,ost .//4
%ependent 7ariable &O@ &O@ &O@ 'tock &eturn
3in%ep -/.//:. /.//6:DDD -/./469
E/.//>9F E/.//40F E/./.:/F
3in%epD ,re -&O@1 -/.4:=>DDD -/.4::=DDD -/.4.04DD
E/./>5:F E/./>60F E/./9==F
'ize /./4:/DDD /./4>/DDD /./4.5DDD /.///4
E/.//45F E/.//46F E/.//4=F E/.//5.F
8*? -/.//44D -/.///5 -/.///9 -/./>06DDD
E/.///=F E/.///=F E/.///=F E/.//99F
<everage -/./>90DDD -/./>:5DDD -/./>5=DDD -/.450>DDD
E/./4.6F E/./4.5F E/./4>/F E/./=0.F
?eta -/./>/6DD
E/./4:9F
%emand 'ensitivity -/./00/DDD -/./059DDD -/.>094DD
E/./.0:F E/./.66F E/.46:/F
,re -&O@1 -/.//:: -/.//>0 -/.///:
E/.//>>F E/.//>4F E/.//.6F
"onstant /./96/DDD /./=:.DDD -/./04=DDD -/.>0..DDD
E/./44:F E/./4/5F E/./.4/F E/.4.49F
Industry 3ixed Hects no no yes no
Observations =#:// =#:// =#:// 9#5/.
&-s$uared /..> /..== /.>9. /.>=>
=2
*able =# ,anel ?
4 . > : 9 =
,ost .//6 - 8L"s ,ost .//4 - 8L"s
%ependent 7ariable &O@ &O@ 'tock &eturn &O@ &O@ 'tock &eturn
3in%ep /.///4 -/./>44 /.//:6DD /.//0:
E/.//./F E/./.>4F E/.//..F E/./464F
3in%epD8L"s -/./4=>DDD -/./4/6DDD
E/.//>4F E/.//>:F
3in%epD non-8L"s /.//>= /.///.
E/.//.:F E/.//66F
3in%epD ,re -&O@1 D 8L"s -/.4/..DDD /.//94 -/.4=5:DDD -/.4=>4DDD
E/.//0:F E/./.4>F E/./.::F E/./:/4F
3in%epD ,re -&O@1 D non-8L"s -/./.0=D /./404 -/.4:49 -/.>6/4
E/./496F E/./669F E/.4/9>F E/...0>F
,re -&O@1 -/.//66DDD -/././ -/.//.4 /.///
E/.//45F E/./4:0F E/.//4>F E/.//40F
8L"s -/./:9/DDD -/./:99DDD -/./:.9 -/./>6/DDD -/./>65DDD /./>55
E/.//6:F E/.//66F E/./:=>F E/.//6.F E/.//=5F E/./>/4F
'ize /./.>.DDD /././/DDD -/./45: /./4>5DDD /./4..DDD /.//.:
E/.//:>F E/.//.=F E/./440F E/.//.>F E/.//45F E/.//64F
8*? /.//>6DDD /.//>9DDD -/./>:.DDD /.///. /.///. -/./>.4DDD
E/.//4>F E/.//44F E/.//06F E/.//44F E/.///5F E/.//6/F
<everage -/./6=9DDD -/./69:DDD -/.9/>0DDD -/./9./DDD -/./9/>DD -/....>DDD
E/./49>F E/./495F E/.4/0:F E/./45>F E/./45:F E/./0:/F
?eta -/./>=4 -/./49
E/./.90F E/./.64F
%emand 'ensitivity /./4=9 /./466 -/..56= -/./:/9 -/./>5= -/.4>:>
E/./.0:F E/./.6/F E/.450=F E/./.9/F E/./.:/F E/.46>=F
"onstant -/./900D -/./>0.D 4.4595DDD -/.4.0:DD -/./55=DD -/..455DDD
E/./>:4F E/./.40F E/..900F E/./:50F E/./:45F E/./6:=F
Observations :#446 :#446 >#5/: .#.50 .#.50 .#/0.
&-s$uared /.>4: /.:/> /.:49 /..95 /.>/5 /.>>:
==
(able . )Banel 9, presents the results for the post/200+ )columns 1 to 4, an' post/2001
perio's )columns E to 8," #ur hypothesis recei%es strong support" (he interactions terms
+inDe#,Pre )ROA,
2007
an' +inDe#,Pre )ROA,
2001
are signi!cantly negati%e in all speci!/
cations, meaning that !rms with nee's for e<ternal !nance for their in%estments an' a larger
propensity for corporate ris$/ta$ing spurre' by a%ailable li:ui'ity ha' a lower pro!tability an'
a greater 'ecline in stoc$ prices when hit by the cre'it crunch" (he estimates are economically
signi!cant" -or e<ample, using the estimates from column 2, an increase in the ris$/ta$ing before
the 200+ crisis by one stan'ar' 'e%iation )0"18E, woul' generate an e<tra 'ecline in 2#9 by
0"24." Since the a%erage 2#9 is 2"0., the 'ecline is about 12K of the a%erage 2#9"
4
Similarly,
using estimates from column . of Banel 9, an increase in Pre )ROA,
2001
by one stan'ar'
'e%iation )0"2==, woul' generate an e<tra fall in 2#9 by 0"2== )about 8K of the a%erage 2#9,"
-or robustness, we also run regressions e<clu'ing the +inDe# 1n'e< from our mo'el = )an'
conse:uently inclu'ing in'ustry !<e' e&ects, with unchange' results )columns = an' +," 6e also
run our speci!cation with the a%erage growth in capital e<pen'itures after the crises perio's, an'
we again !n' that !rms with greater !nancial nee's for e<ternal !nance an' larger ris$/ta$ing
propensity ha' to cut their corporate in%estments more when hit by a cre'it crunch )results not
reporte' for space reasons,"
(a$en together, our results show the 'ouble/e'ge' nature of global li:ui'ity for corporate
ris$/ta$ing" Curing perio's when cre'it is rea'ily a%ailable an' global li:ui'ity is high, !rms
with high e<ternal !nancial 'epen'ence can ta$e a'%antage of the permissi%e !nancial con'i/
tions" Howe%er, when the cycle turns, those same !rms that bene!te' most from the rea'y
a%ailability of cre'it are the ones that su&er the sharpest setbac$s" 4orporate ris$/ta$ing
therefore has a two/si'e' nature that 'epen's on the time series 5uctuations of global li:ui'ity"
-inally, we in%estigate how multinational companies !t in this picture" 6e i'entify multi/
/./5. ,ost-.//6# the log dierence of stock price index is -5>.=N on average with a standard deviation as large as
=5N. 'uch statistics are very similar to those provided by *ong and Wei -./441 for a smaller sample of countries.
,ost-.//4# the log dierence of stock price index is ->4.:9N on average with a standard deviation as large as
9/N.
4
*he calculation uses the estimated coeOcient of ,re -ROA1
2007
and 3in%epD,re -ROA1
2007
in "olumn
. and the average value of 3in%ep -/.44:1 E/.409D--/.4/:.1D/.44: P --/.//4:1D/.409F.
=4
national !rms as those with the upper tercile of the foreign assets ratio an' non/multinational
!rms as those in the lower tercile" 6e interact +inDe# an' +inDe#,Pre )ROA, with a 'ummy
that ta$es a %alue of 1 )0 otherwise, if !rm is multinational )MN4s, or with a 'ummy that ta$es
the %alue of 1 )0 otherwise, if a !rm is not multinational )non/MN4," (able ., Banel B, show
that multinational !rms with a greater nee' for e<ternal !nance for their in%estments )hence
more e<pose' to global li:ui'ity, an' a larger propensity for corporate ris$/ta$ing spurre' by
the a%ailable li:ui'ity ha' lower pro!tability an' a greater 'ecline in stoc$ prices than non/
multinational !rms post/200+ an' post/2001 crises"
5
Speci!cation = is the only e<ception where
multinational an' non/multinational 'o not 'i&er in their post crisis beha%ior" #%erall, to the
e<tent that they are larger !rms with more lin$s to global ban$s, once global ban$s 'rasti/
cally re'uce the pro%ision of li:ui'ity, multinational !rms su&er more from li:ui'ity cutbac$s"
(hese are the same companies that too$ most a'%antage of global li:ui'ity for greater corporate
ris$/ta$ing )see (able 4,"
+2 Domestic Banking Crises
1n a''ition to the 200+ an' 2001 global crises, which ha' a 'irect impact on the global li:ui'ity
a%ailable worl'wi'e, countries may ha%e e<perience' local 'omestic ban$ing crises with impacts
on li:ui'ity pro%i'e' by the li:ui'ity pro%i'e' by 'omestic ban$s an', subse:uently, corporate
operations an' in%estment 'ecisions" -or instance, CellH9riccia, Cetragiache, an' 2a;an )2008,
!n' that ban$ing crises are usually followe' by lower cre'it an' >CB growth" 6e therefore
a'opt a similar approach use' in CellH9riccia et al" )2008, an' construct in'i%i'ual country
'ummies e:ual to 1 )0 otherwise, for each year in which a country e<periences a ban$ing sector
crisis as classi!e' by ?ae%en an' Valencia )2010, )Domestic (risis," 6e then a'' the 'ummy
Domestic (risis to mo'el 2, which is also interacte' with Global Liquidity an' +inDe# %ariables
in some speci!cations"
5
3-tests re(ect that the coeOcients FinDep*MNCs and FinDep*non-MNCs, and the coeOcients FinDep*Pre
-ROA1D8L"s and FinDep*Pre -ROA1Dnon-8L"s are statistically e$ual# with the exception of specication
>.
=E
*able 6. Corporate Risk-Taking and Local #omestic Crises. *his table reports results from panel
regressions with country xed eects. 3in%ep is the external nancial dependent index for the period 455/-.//=
and for each >-digit 'I" sector as updated by *ong and Wei -./441. ;lobal <i$uidity is the leverage of the B'
broker-dealer sector and C;lobal <i$uidity is its annual growth. %omestic "risis is a dummy e$ual to 4 for each
year in which a country experiences a banking sector crisis as classied by <aeven and 7alencia -./4/1 and /
otherwise. @ll the specications include the following control variables! 'ize# <everage# 8*?# and ;%, growth.
'tandard errors are reported in parantheses and are clustered at the rm level.
4 . > :
3in%ep -/./4/0DDD -/./4/5DDD -/./4/5DDD -/./4/0DDD
E/.//>0F E/.//>5F E/.//>0F E/.//>5F
;lobal <i$uidity /.//>9DDD /.//>9DDD /.//>:DDD /.//>9DDD
E/.///.F E/.///.F E/.///.F E/.///.F
J;lobal <i$uidity /./>0=DDD /./>0=DDD /./>69DDD /./>0=DDD
E/.//>4F E/.//>4F E/.//>4F E/.//>4F
3in%epD;lobal <i$uidity /.///6DDD /.///6DDD /.///6DDD /.///6DDD
E/.///.F E/.///.F E/.///.F E/.///.F
3in%epDJ;lobal <i$uidity /.//==DD /.//==DD /.//==DD /.//==DD
E/.//>4F E/.//>4F E/.//>4F E/.//>4F
;lobal <i$uidityD"risis /.//:4DDD
E/.//4/F
J;lobal <i$uidityD"risis /./:05DD
E/./..9F
3in%epD%om. crisis /.///>
E/.//4:F
3in%epD;lobal <i$D%om. crisis /.////
E/.///4F
3in%epDJ;lobal <i$D%om. crisis -/.//40
E/.//59F
%omestic crisis -/.//60DD -/.//65DD -/./65:DDD -/.//65DD
E/.//>.F E/.//>.F E/./40/F E/.//>.F
"onstant /./>=4DDD /./>=.DDD /./>0:DDD /./>=.DDD
E/.//=>F E/.//=>F E/.//=:F E/.//=>F
"ontrols K K K K
Observations 05#9>9 05#9>9 05#9>9 05#9>9
&-s$uared /./6= /./6= /./6= /./6=
G "ountries =9 =9 =9 =9
=.
(able +, column 1 shows that the coeRcient of the 'ummy %ariable Domestic (risis is
negati%e an' signi!cant, in'icating that, in the presence of a 'omestic ban$ing crisis, corporate
ris$/ta$ing su&ers from setbac$s" #ur >lobal ?i:ui'ity %ariables continue remaining positi%e
an' signi!cant, howe%er" 4olumn 2 shows unchange' results when the 'ummy Domestic (risis
is interacte' with +inDe#" More interesting, column = shows results when the 'ummy Domestic
(risis is interacte' with Global Liquidity )both le%els an' changes," Here, the interaction terms
of Global Liquidity with the 'ummy Domestic (risis are positi%e an' signi!cant, in'icating
that the impact of global li:ui'ity on corporate 'ecisions is particularly important 'uring local
'omestic crises, i"e", when companies nee' e<ternal !nance most" -inally, in column 4, we
a'' a triple interaction term +inDe#Global LiquidityDomestic (risis, which is not signi!cant,
in'icating that the e&ect of global li:ui'ity continues to remain important for those !rms more
'epen'ent on e<ternal !nance, e%en in the presence of a local 'omestic crisis" (a$en together,
these results highlight the importance of global li:ui'ity in alle%iating !nancial constraints in
normal times an' also 'uring 'omestic crises"
, C-annel from Global to $ocal
(he e%i'ence abo%e points to the important role playe' by the global interconnections of the
ban$ing sector in 'ri%ing the common global factor in corporate ris$/ta$ing" 6e now e<amine
some of the implications for time series %ariation in the 'omestic ban$ing sector an' corporations"
Speci!cally, we aim to show the impact of the global li:ui'ity factor on local 'omestic ban$s
that operates as the transmission channel of li:ui'ity con'itions to non/!nancial borrowers"
Here, we complement an' e<ten' the mo'el 'e!ne' by Bruno an' Shin )201=, to in%estigate
the channels through which greater a%ailability of cre'it 5ows 'irectly a&ects local ban$s an',
subse:uently, the in%estment an' operational 'ecisions of non/!nancial corporations"
6e begin by in%estigating the impact of >lobal ?i:ui'ity on the local ban$ing system for
our sample of countries" 6e run #?S regressions with stan'ar' errors clustere' at the country
le%el where %arious in'icators of local pro%ision of li:ui'ity are regresse' on our >lobal ?i:ui'ity
=+
*able 0. Global Liquidity$ Local Liquidity and "irm Liabilities. "olumns 4 to > report results of O<'
country-level regressions. *he dependent variable is the ratio of private credit to bank deposits -column 41# the
annual log dierence of external loans by ?I' reporting banks given by the ?I' <ocational 'tatistics *able 6@
-column .1# or the annual log dierence of broad money -column >1. "olumn : reports results of rm-level panel
regressions -see e$uation 41 with the annual change in total liabilities of non nancial rms as the dependent
variable. ;lobal <i$uidity is the leverage of the B' broker-dealer sector and C;lobal <i$uidity is its annual
growth. In columns 4 to ># control variables are ;%, per capita# Ination# the percentage of the assets of
three largest commercial banks as a share of total commercial banking assets -?anking concentration1 and the
governance variable "orruption. "olumn : includes the following control variables! 'ize# <everage# 8*?# and
;%, growth. 'tandard errors are in parantheses and are cluster-ad(usted at the country level -columns 4 to >1
or at the rm level -column :1.
4 . > :
%ependent 7ariable %omestic ,rivate "redit ?I' <oans ?road 8oney "orporate <iabilities
;lobal <i$uidity /./495D /./.5>DDD /./.:=DDD /.//0=DDD
E/.//09F E/.//>>F E/.//.9F E/.//46F
J;lobal <i$uidity /.>:0:DD /..:>5DDD /.444/DD /.4:4>DDD
E/.4>4=F E/./6..F E/./:.=F E/./:.0F
;%, per capita -/./.4. /./>:0DD /.///0
E/./6:0F E/./4==F E/.//5:F
Ination -/.0..0DD -/./00= -/.4:=9
E/.:/65F E/./6::F E/.4>06F
"oncentration /.//.> /.//4. /.///4
E/.//.5F E/.///6F E/.///=F
"orruption /.//=/D -/.//4> -/.//44DD
E/.//>:F E/.///5F E/.///9F
J;%, /.::.>DD
E/../4.F
'ize /./.54DDD
E/.//..F
<everage /...>:DDD
E/./.==F
8*? -/.//4:
E/.//44F
"onstant /.:=9: -/.0:>4DDD -/.:.9/DDD -/.:>99DDD
E/.9:6=F E/.4495F E/./=05F E/./=/0F
Observations 956 =40 954 4/4#564
&-s$uared /.4>9 /.46 /./06 /./9=
G of countries =/ =4 95 =9
=8
%ariables an' controls" -ollowing Cetragiache, >upta an' (ressel )2008,, we use )the log of,
>CB per capita, 1n5ation, Ban$ing concentration an' the go%ernance %ariable 4orruption as
control %ariables"
6e use three main in'icators of local li:ui'ity an' cre'it con'itions )from the 6orl' Ban$
-inancial Sector Catabase,F 1, the ratio of pri%ate cre'it to ban$ 'eposits, 'e!ne' as the
!nancial resources pro%i'e' to the pri%ate sector by 'omestic money ban$s )1-S line 22', as
a share of total 'eposits )1-S lines 24 an' 2E,P 2, ban$ing sector capital in5ow, as gi%en by
log 'i&erence in the e<ternal claims of B1S reporting country ban$s )(able +9,P the growth
in li:ui' liabilities, as gi%en by the log 'i&erence" ?i:ui' liabilities are also $nown as broa'
money, or M=" ?i:ui' liabilities are the sum of currency an' 'eposits in the central ban$ )M0,,
plus transferable 'eposits an' electronic currency )M1,, plus time an' sa%ings 'eposits, foreign
currency transferable 'eposits, certi!cates of 'eposit, an' securities repurchase agreements )M2,,
plus tra%elersH chec$s, foreign currency time 'eposits, commercial paper, an' shares of mutual
fun's or mar$et fun's hel' by resi'ents"
1f >lobal ?i:ui'ity, as pro<ie' by the le%erage in the 0S bro$er/'ealer sector, a&ects local
cre'it, capital 5ows, an' li:ui' liabilities, we can then infer that >lobal ?i:ui'ity 'irectly
a&ects local ban$s fun'ing an' in%estment 'ecisions" (able 8, columns 1 to = shows that
the coeRcients of Global Liquidity an' JGlobal Liquidity are positi%e an' signi!cant in e%ery
speci!cation" (hese results con!rm the e%i'ence in Bruno an' Shin )201=, that the factors
'ri%ing capital 5ows an' local !nancial con'itions can be foun' in the 'eterminants of the
balance sheet capacity of global ban$s"
How 'o companies react to the greater a%ailability of li:ui'ityS 1n column 4, we run our
benchmar$ panel speci!cation )1, use' in (able 2 with the change )log 'i&erence, in total
liabilities as the 'epen'ent %ariable" 6e obser%e that both the coeRcients Global Liquidity
an' JGlobal Liquidity are positi%e an' signi!cant, meaning that !rms increase the sie of their
balance sheet by borrowing more, as pre'icte' by the Bruno an' Shin )201=, theoretical mo'el"
(he e%i'ence on )ROA, an' )CA!E", shown in (able 2 completes the circle, as it shows
how global li:ui'ity in the center propagates through local ban$s to borrowing !rms that use
=*
the li:ui'ity for ris$ier pro;ects"
. Discussion and Future Researc-
1n this paper, we ha%e e<plore' the conse:uences of the !nancial systemHs globaliation on
corporate ris$/ta$ing" 6e see our main contribution as being the i'enti!cation of a common
factor that 'ri%es corporate ris$/ta$ing globally / both for a'%ance' an' for emerging economies
/ that is closely associate' with the acti%ities of the global ban$ing system" #ur primary
contribution is the i'enti!cation of a common factor that in'uces como%ements in !nancial
con'itions across bor'ers an' lea's !rms to ta$e on greater ris$" 9''itionally, our paper
brings a time series 'imension to the stu'y of corporate ris$/ta$ing, which complements the
pre'ominantly cross/sectional approach ta$en by the e<isting literature" 6e also show how the
interaction of the cross/section an' time series e&ects )for instance, through the interaction of
!nancial 'epen'ence with global li:ui'ity, yiel's rich insights into the ris$/ta$ing beha%ior of
!rms"
#ur results ma$e numerous connections among the corporate !nance, international business,
an' macroeconomics literature that e<amine international capital 5ows" 9lthough much of the
e<isting research on international capital 5ows has focuse' on aggregate macro time series,
our !n'ings suggest the possibility of a''ing granularity to the results by complementing the
aggregate picture with more !nely te<ture' 'etails on the actions of in'i%i'ual !rms" (he
e%i'ence shown in this paper is in line with the i'ea that an increase in the %ariability of
returns of !rms is lin$e' to como%ements an' greater connecte'ness in !nancial con'itions
across bor'ers"
Aet another a%enue for further in%estigation woul' be to e<amine the lin$ between the
ban$ing sector an' the non/!nancial corporate sector in more 'etail" #ne $ey aspect that
woul' bene!t from more 'etaile' in%estigation is how the borrowing an' fun'ing 'ecisions of
multinational companies woul' interact with the fun'ing of the ban$ing sector" -urther research
will un'oubte'ly yiel' a''itional insights"
40
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