Essays on international macroeconomics and corporate finance

Huang, Yi (2011) Essays on international macroeconomics and corporate finance. Doctoral thesis, University of London: London Business School.

Abstract

My dissertation interests lie at the intersection of international macroeconomics and finance. I am particularly interested in the determinants driving financial activity and economic performance in the era of globalization. Most of my research to date has been devoted to three main areas: corporate saving, financing and investment decisions; countries' external balance sheet with valuation effects and macro-finance linkage. My interest in the effect of financial frictions, institutional environments on decisions of economic agents started with my PhD dissertation. The first essay sheds new light on corporate saving behaviour and determinants, and more importantly, the process whereby firms accumulate savings. The second essay focuses on the consequences of corporate debt financing by examining how ownership structure and financial market development influence firms' leverage choice. The last essay examines valuation effects and investigates its effect on external wealth and excess returns of China. In the first chapter, I use matched customs and firm-level data from Q1 2002 to Q4 2009 to examine which factors influence corporate savings decisions in China. The investigation illustrates that the precautionary motive plays a crucial role in explaining firms' savings behaviours. I start by documenting that a firm's savings are highly sensitive to its ownership structure. This negative association indicates that private firms tend to save more than state-owned enterprise when firms with valuable future investment opportunities and firms with limited access to finance might accumulate precautionary savings. To address endogeneity concerns, difference-in-difference estimations support the causal impact of precautionary motives on corporate savings. Strikingly, I find that export firms tended to save more during the recent crisis. This finding challenges the mainstream view that an unexpected negative shock would cause a decline in external demand for the export-oriented industry, causing its savings to drop significantly. One interpretation of the results is that the precautionary motive under financial friction increases corporate propensity to save. The results highlight the importance of developing Chinese financial markets in order to channel savings to investment. One policy implication is that the low dividend payment by state-owned firms is less of a factor in causing the gap between saving and investment than the IMF has suggested. In the second chapter, I explore the effects of ownership concentration on corporate debt financing decisions when the state is the largest shareholder. Based on the unique institutional environment of China and hand-collected shareholder information, I empirically examine the competing views about the relationship between ownership structure and a firm's leverage choice. Surprisingly, I find that leverage and short-term debt ratio are lower when the largest shareholder is government-related than otherwise. Controlling for other factors, I also provide evidence that higher leverage and short-term debt ratio are associated with less concentrated in ownership structure. Finally, I develop the instrumental variables (IV) linked to financial reform that diffused ownership concentration to identify the causal inference between ownership structure and leverage choice. One interpretation of my results is that capital market frictions in the form of ownership concentration and large government shareholding play an important role in debt financing choice due to financial repression policies. The final chapter, starting with the methodologies of Lane and Milesi-Ferretti (2007), I construct estimates of China's external assets and liabilities at the market price for the period 1997-2009. In this paper, I study China's net foreign assets position with valuation adjustment and excess returns between gross assets and liabilities. Also, I decompose the returns differential into FDI, portfolio equity, debt and foreign reserves. I show that net foreign assets, which are mainly dominated by foreign reserve assets and FDI liabilities, have grown rapidly since 2001 and exceeded 35% of GDP in 2009. My most striking and strong finding is the considerable size of negative excess returns as much as 6.6% per year. This occurs mainly because of the asymmetric structure of the external balance sheet of China: short position in equity and long position in debt. Finally, I find a robust return effect: the outstanding performance of inward FDI compared to outward FDI and portfolio equity and debt investment by foreign reserves. This finding indicates that China has not yet transformed from a successful world factory into a profitable world creditor. My findings might facilitate understanding of the external balance of Chinese and foreign reserves with capital account regulation policy under state controlled foreign asset investment.