Who benefits from capital account liberalization? Evidence from firm-level credit ratings data

Using a novel panel data set on corporate foreign-currency credit ratings and capital account restrictions in advanced and emerging economies during 1995–2004, we find a strong positive effect of capital account liberalization on firms' credit risk, as measured by corporate credit ratings. As an identification strategy, we exploit within-country variation in firms' ability to obtain foreign currency and, thus, their ability to repay foreign currency debt. We find that liberalizing the capital account benefits significantly more those firms with more limited foreign currency access, namely, those producing nontradables. Our findings demonstrate a novel channel through which capital account restrictions affect economic outcomes, and they are robust to a broad range of alternative specifications.