The Real E¤ects of Capital Controls: Credit
Constraints, Exporters and Firm Investment (by Alfaro
et al.)
Discussion
Alessandra Bon…glioli
UPF, BGSE and CEPR
Barcelona, 10 June 2014
A. Bon…glioli
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
1 / 10
The Paper in a nutshell
aim: estimating the e¤ects of various types of capital controls on the
value of …rms
event-study approach: Brazil between March 2008 and April 2012
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capital controls (taxes) on …xed-income, debt and equity investment +
FX derivatives
15 events = policy interventions (on/o¤ or variation in intensity)
outcome of interest: 2-day Cumulated Abnormal Returns (CAR)
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69 …rms of the BOVESPA
results:
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A. Bon…glioli
negative CAR for all interventions (both pooled and by type)
larger …rms su¤ered less
large exporters su¤ered less
…rms with higher external …nance dependence su¤ered more
investment dropped
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Theoretical Framework: CAPM
capital controls hurt …rms if the returns required by investors rise
assume returns required to …rm i, E R̃i follow the CAPM
E R̃i = rf + βiM E R̃M
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rf
M = market portfolio, rf = risk-free interest rate
βim = Cov (Ri , RM ) /Var (RM )
if no capital restrictions and perfect int’l portfolio diversi…cation:
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E R̃M = E R̃W , βiM = βiW , rf = rfW ! E R̃iM = E R̃iW
if complete autarky:
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A. Bon…glioli
i
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rf > rfW ! E R̃iM > E R̃iW (most likely for an emerging market)
βim T βiW ? depends on i’s correlation with domestic vs world market
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Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Theoretical Framework: Abnormal Returns
express abnormal returns at the time of policy announcement, t, as
ARit
Rit
E [Rit jno policy]
compute E [Rit jno policy] as
E [Rit jno policy] = α̂i + β̂iM RMt
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coe¢ cients α̂i and β̂iM estimated from market model:
Ris = αi + βiM RMs + εis
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for s 2 [t
280, t
30] days
ARit < 0 if E R̃itM > E R̃itW :
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A. Bon…glioli
increase the risk-free rate
…rm i is more subject to domestic systemic risk than international risk
…rm i’s expected dividends drop ! Rit drops
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Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Empirical Strategy
compute cumulated AR over a two-day window after each event
CARit,t +1 = ARit,t +1 + ARit +1
estimate
CARit,t +1 = c + bXit
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1y
+ eit
c = constant (captures average CAR)
Xit 1y = …rm-level controls: size, leverage, debt maturity, export
status, credit constraints
consider all events t jointly (panel)
split the sample to distinguish b/w controls on equity vs debt
beyond the news e¤ect:
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A. Bon…glioli
estimate e¤ect of lagged event on …rm-level quarterly investment
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Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Results
negative average CAR: ĉ < 0
"less negative" for large …rms
"less negative" for big exporters (> $100 million)
stronger for …rms with low cash ‡ow relative to capital expenditure
(high EFD)
both controls on debt and equity a¤ect stock returns
investment falls, mainly after the event of October 2008
A. Bon…glioli
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
6 / 10
Questions and Comments
β̂ from t 280 to t 30 may incorporate the e¤ects of prior events:
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downward/upward (?) bias on β̂ and α̂?
repeat the CAR estimation for single events with constant only
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which events were more e¤ective?
"placebo" tests + comparison with other events:
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CAR over other no-news days or capital controls unrelated events
di¤erent in size from other announcement e¤ects?
graphical analysis:
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A. Bon…glioli
plot the distribution of CARit,t +1 for each event
plot the distribution of CARit,t +1 by size bin/ export status
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Questions and Comments
large …rm + big exporter + unconstrained ! MNCs!
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MNC typically big exporters + "internal capital market"
would MNC capture the entire e¤ect?
interesting to-do list: longer-term e¤ects on …rm-level investment +
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number of export destination markets, number of products...
productivity?
markups?
Varela (2014) shows that Hungarian …rms reacted to FX liberalization
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A. Bon…glioli
increasing TFP and technology adoption (especially credit constrained
non-MNCs)
lowering markups (especially MNCs)
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
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Questions and Comments
…rm-speci…c heterogeneity: βs or dividends?
can you separately estimate "good" and "bad" β’s?
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disentangle news on cash ‡ow from news on discount rate
e¤ects on volatility of returns? that was (in part) the policy goal...
can you estimate post-event β?
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give an idea of whether and how …rm returns correlation with the
market return changed
very low R2 : is it due to high dispersion in CAR relative to (quarterly)
…rm characteristics?
quantifying the contribution of …rm characteristics: are coe¢ cients
(semi) elasticities?
A. Bon…glioli
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
9 / 10
Conclusions
pleasant reading
good data
richness of well identi…ed events (unless other events coinciding on
the same day)
signi…cant results
leaves me eager to learn more on the mechanism
A. Bon…glioli
(UPF, BGSE and CEPR )
Discussing Alfaro et al. (2014)
Barcelona, 10 June 2014
10 / 10