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The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis

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  • Hui Tong
  • Shang-Jin Wei

Abstract

This article studies whether the volume and composition of capital flows affect the degree of credit crunch during the 2007--2011 crisis. Using data on 3,823 firms in 24 emerging countries, we find that, on average, the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. Interestingly, while the volume of capital flows per se has no significant effect, the composition matters a lot. In particular, greater dependence on non-FDI capital inflows before the crisis worsens the credit crunch during the crisis, while exposure to FDI alleviates the liquidity constraint. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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  • Hui Tong & Shang-Jin Wei, 2011. "The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2023-2052.
    • Handle: RePEc:oup:rfinst:v:24:y:2011:i:6:p:2023-2052
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq078
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    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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