Taking the Bad with the Good : Volatility of Foreign Portfolio Investment and Financial Constraints of Small Firms

The author examines the impact of the volatility of foreign portfolio investment on the financial constraints of small firms. Using a dataset of over 195,000 firm-year observations across 53 countries, she examines the impact of foreign portfolio investment instability on capital issuance and firm growth across countries and firm characteristics, in particular size. After controlling for the endogeneity of foreign portfolio investment instability, as well as for firm-, industry-, and country-level characteristics such as GDP growth, as well as the levels of foreign portfolio and direct investment, the author finds that the volatility of foreign portfolio investment is only significantly associated with a decreased ability to issue publicly-traded securities for small firms in years when nations are considered less "creditworthy." The volatility of foreign portfolio investment only hinders the growth of small firms significantly in periods when nations are deemed less "creditworthy." These results underscore both the significance of a good financial system that minimizes capital flow volatility, as well as the influence of property rights and country creditworthiness to instill confidence in foreign investors.

Bibliographic Details

Main Author:	Knill, April M.
Language:	English
Published:	World Bank, Washington, DC 2005-12
Subjects:	ACCOUNTING, ASSET VALUE, ASSETS, BANKING CRISES, BANKRUPTCY, BOOK VALUE, BUSINESS CYCLES, CAPITAL FLOW, CAPITAL FLOWS, CAPITAL INFLOW, CAPITAL INFLOWS, CAPITAL MARKET, CAPITAL MARKETS, CAPITAL STOCK, COMMON STOCK, CONVERTIBLE DEBT, CORPORATE GOVERNANCE, COST OF CAPITAL, DAMAGES, DEBT, DIRECT INVESTMENT, DISCLOSURE, DIVIDENDS, DOMESTIC CREDIT, DOMESTIC INVESTMENT, DOMESTIC INVESTORS, ECONOMIC GROWTH, ECONOMICS, EMERGING MARKETS, EXCHANGE RATE, EXCHANGE RATES, EXTERNAL FINANCING, FINANCIAL INFORMATION, FINANCIAL INSTITUTIONS, FINANCIAL MARKET, FINANCIAL MARKETS, FIXED ASSETS, FOREIGN CAPITAL, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN INVESTMENT, FOREIGN INVESTORS, GDP, GLOBAL CAPITAL, GLOBAL CAPITAL FLOWS, GROSS DOMESTIC PRODUCT, GROSS DOMESTIC PRODUCT PER CAPITA, GROWTH RATE, INFLATION, INSTITUTIONAL INVESTORS, INTEREST RATES, INTERNATIONAL INVESTORS, INVESTMENT CLIMATE, INVESTMENT ENVIRONMENT, INVESTMENT IMPACTS, INVESTMENT REGULATIONS, INVESTOR CONFIDENCE, INVESTOR PROTECTION, IPO, IPOS, LATIN AMERICAN, LEADING INDICATORS, LESS DEVELOPED COUNTRY, LIQUIDITY, MACROECONOMIC CONDITIONS, MACROECONOMIC PERFORMANCE, MACROECONOMIC STABILITY, MARKET INTEGRATION, MARKET LIBERALIZATION, MARKET VALUE, MARKET VOLATILITY, MINORITY SHAREHOLDERS, MONETARY POLICIES, MONEY SUPPLY, NET FLOWS, PORTFOLIO, PORTFOLIO COMPOSITION, PORTFOLIO INVESTMENT, PORTFOLIO INVESTMENT FLOWS, POTENTIAL DEMAND, PREFERRED STOCK, PROFITABILITY, PROPERTY RIGHTS, RISK AVERSION, SALES, SAVINGS, SECURITIES, SUBSTITUTE, SUBSTITUTION, TRANSPARENCY, VOTING SHARES, WESTERN EUROPE,
Online Access:	http://documents.worldbank.org/curated/en/2005/12/6474501/taking-bad-good-volatility-foreign-portfolio-investment-financial-constraints-small-firms https://hdl.handle.net/10986/8554
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