The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Chari, Anusha; Leary, Ryan; Phan, Toàn

doi:10.21144/wp18-03

Cited by 2 publications

(2 citation statements)

References 33 publications

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“…As a result, firms which are ex-ante more financially constrained should also be positively affected by the inflows, as they could increase their leverage and profitability (Arellano et al, 2017). Further, by reducing government funding costs, sovereign inflows should in principle favor firms which are more closely connected to the domestic government, such as firms which are partially or totally owned by the government, or firms which rely more on government demand for their products (Chari et al, 2018). Thus, the first set of empirical implications which we test in this paper are: i) sovereign debt inflow shocks should positively affect domestic financial firms; ii) sovereign debt inflow shocks should positively affect firms facing greater financial constraints; iii) sovereign debt inflow shocks should positively affect government-related firms.…”

Section: Theoretical Background and Testable Implicationsmentioning

confidence: 99%

“…6 For instance, Hébert and Schreger (2017) estimates the cost of sovereign default for listed Argentinian companies exploiting legal rulings against Argentina. Similarly, Andrade and Chhaochharia (2018) and Chari et al (2018) analyze the costs of sovereign default (in Europe and Puerto Rico, respectively) and find that firms that are more closely related with the domestic government tend to be more sensitive to changes in the risk of default. 7 Altavilla et al (2017), andBottero et al (2020) also provide evidence which is consistent with this channel.…”

Section: Introductionmentioning

confidence: 99%

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Winners and Losers from Sovereign Debt Inflows

Broner,

Martin,

Pandolfi

et al. 2020

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We study the transmission of sovereign debt inflow shocks on domestic firms. We exploit episodes of large sovereign debt inflows in six emerging countries which are due to the announcements of these countries' inclusion in two major local currency sovereign debt indexes. We show that these episodes significantly reduce government bond yields and appreciate the domestic currency, and have heterogeneous spillovers on domestic firms. Financial and government-related firms experience positive abnormal returns in the days following the announcement episodes. Instead, companies operating in tradable industries exhibit negative abnormal returns after the episodes. We find that the former expansionary effect is more pronounced in countries where the government bond yields drop more in response to the announcement, while the latter recessionary effect is larger in countries where the domestic currency appreciates more. Also, we find that firms which rely more on external financing are positively affected by these events. Our findings shed novel light on the channels through which sovereign debt inflows affect firms in recipient countries. They suggest that these inflows can contribute to reshaping the domestic economy, by increasing the importance of the non-tradable sector at the expenses of the tradable one.

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Section: Theoretical Background and Testable Implicationsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Winners and Losers from Sovereign Debt Inflows

Broner,

Martin,

Pandolfi

et al. 2020

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Winners and Losers from Sovereign Debt Inflows: Evidence from the Stock Market

et al. 2019

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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.

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The Costs of (sub)Sovereign Default Risk: Evidence from Puerto Rico

Cited by 2 publications

References 33 publications

Winners and Losers from Sovereign Debt Inflows

Winners and Losers from Sovereign Debt Inflows

Winners and Losers from Sovereign Debt Inflows: Evidence from the Stock Market

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