The Composition Matters

We study whether capital flows affect the degree of credit crunch faced by a country''s manufacturing firms during the 2007-09 crisis. Examining 3823 firms in 24 emerging countries, we find that the decline in stock prices was more severe for firms that are intrinsically more dependent on external finance for working capital. The volume of capital flows has no significant effect on the severity of the credit crunch. However, the composition of capital flows matters: pre-crisis exposure to non-FDI capital inflows worsens the credit crunch, while exposure to FDI alleviates the liquidity constraint. Similar results also hold surrounding the Lehman Brothers bankruptcyBanking crisis;Banking sector;Capital flows;Capital inflows;Credit restraint;Emerging markets;Liquidity controls;Manufacturing sector;Spillovers;Stock prices;Transition economies;stock price, working capital, financial dependence, international capital, capital flow, financial globalization, capital inflow, capital market, international capital flows, composition of capital inflows, stock returns, foreign capital, international capital inflows, international finance, capital reversal, capital needs, international banks, cash flow, portfolio investment, financial institutions, capital flow reversal, capital expenditures, stock price index, financial market, capital account liberalization, foreign portfolio investment, stock market capitalization, cost of capital, financial sector, stock price performance, bonds, global capital flows, capital markets, domestic credit, currency crises, financial economics, capital controls, international capital market, subsidiaries, stock market, international bank lending, liquidity crises, financial intermediation, capital flow reversals, stock price reactions, capital _ flow, cash flow from operations, international financial statistics, stock splits, market asset, border capital flows, credit expansion, international financial markets, capital_flow, financial system, financial markets