Capital Controls, Risk, and Firm Performance: Cross-country Evidence from Corporate Bond Issuance

We study how controls on capital inflows impact firms’ financing and real outcomes in emerging markets using a novel dataset that merges firm-level bond issuance and balance sheet data with granular measures of capital controls. We uncover a bond channel whereby a tightening of controls on nonresident purchases of domestically issued corporate bonds reduces the likelihood of subsequent bond issuance by about one-third of the historical average. This effect operates through two distinct channels linked to the heterogeneous impact of these policies across firms’ characteristics: a prudential channel, where riskier, more leveraged firms curtail issuance more sharply, and a productivity channel, in which more productive firms also reduce issuance. Crucially, however, only the prudential channel persists when analyzing firms’ total liabilities and investment. Riskier firms reduce total liabilities and cut back on investment, while more productive firms maintain their investment plans by substituting away from bond markets, including via reduced dividend payouts. We further examine how these dynamics vary across domestic vs. global financial cycles and across alternative measures of firm risk and productivity, and by documenting substitution margins via dividend payouts. We end with a discussion of the policy implications of our findings.