Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses

November 2019

Tomas Williams, Charles W. Calomiris, Mauricio Larrain, Sergio L. Schmukler

IIEP working paper 2019-15

Abstract: Emerging market corporations have significantly increased their borrowing in international markets since 2008. We show that this increase was driven by large denomination bond issuances, most of them with face value of exactly US$500 million. Large issuances are eligible for inclusion in important international market indexes. These bonds appeal to institutional investors because they are more liquid and facilitate targeting market benchmarks. We find that the rewards of issuing index-eligible bonds rose drastically after 2008. Emerging market firms were able to cut their cost of funds by more than 76 basis points by issuing bonds with a face value equal to or greater than US$500 million relative to smaller bonds. Firms contemplating whether to take advantage of this cost saving faced a tradeoff after 2008: they could benefit from the lower yields associated with large, indexeligible bonds, but they paid the potential cost of having to hoard low-yielding cash assets if their investment opportunities were less than US$500 million. Because of the post-2008 “size yield discount,” many companies issued index-eligible bonds, while substantially increasing their cash holdings. We present evidence suggesting that these post-2008 behaviors reflected a search for yield by institutional investors into higher-risk securities. These patterns are not apparent in the issuance of investment grade bonds by firms in developed economies.

JEL Classification Codes: F21, F23, F32, F36, F65, G11, G15, G31

Keywords: benchmark indexes, bond issuance, corporate financing, emerging markets,
institutional investors

Drug Money and Bank Lending: The Unintended Consequences of Anti-Money Laundering

March 2019

Tomas Williams, Pablo Slutzky, and Mauricio Villamizar-Villegas

IIEP Working Paper 2019-5

Abstract: We explore the unintended consequences of anti-money laundering (AML) policies. For identification, we exploit the implementation of the SARLAFT system in Colombia in 2008, aimed at controlling the flow of money from drug trafficking into the financial system. We find that bank deposits in municipalities with high drug trafficking activity decline after the implementation of the new AML policy. More importantly, this negative liquidity shock has consequences for credit in municipalities with little or nil drug trafficking. Banks that source their deposits from areas with high drug trafficking activity cut lending relative to banks that source their deposits from other areas. We show that this credit shortfall negatively impacted the real economy. Using a proprietary database containing data on bank-firm credit relationships, we show that small firms that rely on credit from affected banks experience a negative shock to investment, sales, size, and profitability. Additionally, we observe a reduction in employment in small firms. Our results suggest that the implementation of the AML policy had a negative effect on the real economy.

JEL Classification: K42, G18, G21

Keywords: money laundering; organized crime; financial system; bank lending; liquidity; economic growth

How ETFs Amplify the Global Financial Cycle in Emerging Markets

January 2018

Updated: September 2018

Tomas Williams, Nathan Converse, and Eduardo Levy-Yeyati.

IIEP Working Paper 2018-1

Abstract: Since the early 2000s exchange-traded funds (ETFs) have grown to become an important investment vehicle worldwide. In this paper, we study how their growth affects the sensitivity of international capital flows to the global financial cycle. We combine comprehensive fundlevel data on investor flows with a novel identification strategy that controls for unobservable time-varying economic conditions at the investment destination. For dedicated emerging market funds, we find that the sensitivity of investor flows to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. In turn, we show that in countries where ETFs hold a larger share of financial assets, total cross-border equity flows and prices are significantly more sensitive to global financial conditions. We conclude that the growing role of ETFs as a channel for international capital flows amplifies the incidence of the global financial cycle in emerging markets.

JEL Classification: F32, G11, G15, G23

Keywords: exchange-traded funds; mutual funds; global financial cycle; global risk; push and pull factors; capital flows; emerging markets

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