Foreign Capital and Firm Financial Constraints - Evidence from Two Systemic Liquidity Crises

Portfolio capital raised through foreign issuances is seen as volatile and undesirable for countries with poorly regulated financial systems. An implication is that firms that finance themselves in part with such investment have worse outcomes during systemic liquidity crises. I examine firms that had raised capital through foreign public issuances, to analyze their outcomes during two types of systemic liquidity crises: a domestic crisis and a foreign crisis. I find that firms with foreign financing were less liquidity constrained and had better outcomes during the domestic liquidity crisis. They were also no worse off during the foreign liquidity crisis. This evidence underscores a novel finding viz. foreign capital issuance, a non-FDI kind of foreign capital, has value in the form of an insurance that pays off during bad shocks to domestic financial markets. Decomposing foreign debt and foreign equity issuances, I find that even large and otherwise efficient firms that had foreign debt issuances and were levered towards short-term debt, were more financially constrained during the domestic crisis. Contrary to traditional hypotheses which suggest that debt, being easier to raise, is preferable to equity, the crisis-period implications of holding large amounts of foreign debt can be quite adverse, and therefore makes for a riskier financing choice