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Winners and losers from Sovereign debt inflows: evidence from the stock market

Fernando Broner, Alberto Martin, Lorenzo Pandolfi and Tomas Williams ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper analyzes the effects on firms of sovereign debt inflows in emerging countries. To deal with the endogeneity between capital inflows and economic activity, we focus on capital inflows driven by countries’ inclusions into well-known local currency sovereign debt market indexes. These events convey little information about the future economic prospects of countries but induce large capital flows from institutional investors tracking the indexes. We show that inclusion-driven flows significantly reduce government bond yields and appreciate the domestic currency. In turn, these flows have heterogenous impact on firms’ stock market returns. Government related firms, financial firms and firms with larger financial constraints experience positive abnormal returns following the announcement of these events. Instead, companies operating in export-intensive sectors have negative abnormal returns. Our findings shed novel light on the channels through which capital inflows to sovereign debt markets affect firms in the economy.

Keywords: Sovereign debt; capital inflows; exchange rate; government bond yields; external financial dependence (search for similar items in EconPapers)
JEL-codes: F31 F32 F36 G15 G23 (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-cfn, nep-fmk and nep-opm
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Working Paper: Winners and Losers from Sovereign Debt Inflows: Evidence from the Stock Market (2020) Downloads
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