THE RISE OF DOMESTIC CAPITAL MARKETS FOR CORPORATE FINANCING THE RISE OF DOMESTIC CAPITAL MARKETS FOR CORPORATE FINANCING © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: +1-202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover Design & Report Layout: Kane Chong JEL Classification Codes: F33; G00; G01; G15; G21; G23; G31 Keywords: Asian Financial Crisis; corporate bond markets; corporate financing; Global Financial Crisis; SME capital markets; stock markets; syndicated loan markets THE RISE OF DOMESTIC CAPITAL MARKETS FOR CORPORATE FINANCING Facundo Abraham, Juan J. Cortina, and Sergio L. Schmukler June 2019 4 The Rise of Domestic Capital Markets for Corporate Financing Acknowledgments This paper is a joint product of the World Bank Development Research Group, the East Asia and Pacific Region, and the Finance, Competitiveness, and Innovation Global Practice at the Global Knowledge and Research Hub in Malaysia. This paper is also available as World Bank Policy Research Working Paper 8844. The paper was prepared by Facundo Abraham, Juan J. Cortina, and Sergio L. Schmukler. For helpful comments and data provided, we are grateful to Ashraf Bin Arshad, Irina Astrakhan, Ana Maria Aviles, Anderson Caputo, Jian Chen, Jose de Luna Martinez, Tatiana Didier, Catiana Garcia-Kilroy, Aart Kraay, Norman Loayza, Andrew Mason, Sudhir Shetty, various financial sector experts at the World Bank, and participants at presentations held at the Malaysia Securities Commission and the World Bank (Kuala Lumpur and Washington, DC). We received additional financial support from the World Bank Knowledge for Change Program and Strategic Research Program. Email addresses of the authors: fabraham@worldbank.org; jcortinalorente@worldbank.org; sschmukler@worldbank.org. The Rise of Domestic Capital Markets for Corporate Financing 5 Table of Contents Acknowledgments 4 List of Figures and Tables 6 Abbreviations 7 Executive Summary 8 CHAPTER 1: Introduction 10 CHAPTER 2: Data and Methodology 14 Data Sources and Sample 14 Measure of Firm Size 16 CHAPTER 3: Capital Market Financing 18 The Rise of Equity and Bond Financing 18 Domestic vs. International Markets 18 CHAPTER 4: Firms Using Capital Markets 22 Extensive Margin 22 Issuer Size 23 Financial Market Diversification 23 CHAPTER 5: The Role of Policies 26 Capital Market Reforms 26 SME Capital Markets 27 CHAPTER 6: Conclusions 30 References 32 Appendix 34 6 The Rise of Domestic Capital Markets for Corporate Financing List of Figures Figure 1. Growth in Equity and Corporate Bond Financing 35 Figure 2. Share of Domestic and International Issuances 36 Figure 3. Number of Issuing Firms 37 Figure 4. Size of Issuing Firms 38 Figure 5. Firm Size Distribution: Domestic and International Issuers 39 Figure 6. Use of Different Markets by Firm Size 40 Figure 7. Issuance Activity during Crises 41 Figure 8. Size of SME Capital Markets 42 Figure 9. Amount Raised by Sector: Traditional vs. SME Capital Markets 43 Appendix Figure 1. Firm Size Proxy 50 Appendix Figure 2. Growth in Equity and Bond Financing: East Asian Economies 51 Appendix Figure 3. Share of Domestic and International Issuances: East Asian Economies 52 List of Tables Table 1. Summary Statistics 44 Table 2. Issuance Activity 45 Table 3. Share Raised in Domestic Markets 46 Table 4. Extensive Margin: Number of Firms Issuing 47 Table 5. Size of Equity and Corporate Bond Issuers 48 Table 6. Traditional vs. SME Capital Markets 49 Appendix Table 1. Economy Classification 53 Appendix Table 2. Share Raised in Domestic Markets 54 Appendix Table 3. Size (Assets) of Equity and Corporate Bond Issuers 55 Appendix Table 4. Capital Market Reforms – Indonesia 56 Appendix Table 5. Capital Market Reforms – Korea, Rep. 57 Appendix Table 6. Capital Market Reforms – Malaysia 58 Appendix Table 7. Capital Market Reforms – Philippines 59 Appendix Table 8. Capital Market Reforms – Vietnam 60 The Rise of Domestic Capital Markets for Corporate Financing 7 Abbreviations BIS Bank of International Settlements FSD Firm size distribution GDP Gross domestic product GEM Growth Enterprise Market IT Information technology NEEQ National Equities Exchange And Quotations OLS Ordinary least squares SDC Thomson Reuters’ Security Data Corporation SME Small and medium-sized enterprises SOE State-owned enterprise TPEx Taipei Exchange WLS Weighted least squares 8 The Rise of Domestic Capital Markets for Corporate Financing Executive Summary D uring the past decades, firms from emerging Domestic markets also helped some corporations economies have significantly increased the to diversify funding sources and obtain domestic amount of financing obtained in capital currency financing. Policy reforms following the markets. Whereas the literature argues that Asian Financial Crisis accompanied the growth of international markets have been an important domestic markets. Part of the reforms were aimed contributor to this process, the role of domestic at developing domestic capital markets for small and markets is mostly unknown. By examining the case medium-size enterprises. Although these markets of East Asia, this paper shows that domestic markets have developed significantly, they still serve relatively have been a key driver of the observed trends in few corporations, albeit from new sectors. capital market financing since the early 2000s. As domestic markets developed, more and smaller firms gained access to equity and corporate bond financing. The Rise of Domestic Capital Markets for Corporate Financing 9 10 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 1 Introduction F irms from emerging economies have because, although financial markets have become significantly increased the amount of financing increasingly globalized, some degree of market raised in capital markets since the early segmentation might persist over time, and domestic 1990s. An important driver of this rise has been and international markets could serve different types the participation of firms in international markets. of firms. As governments liberalized financial markets in the 1990s and globalization deepened, emerging We address these questions by analyzing the equity economy firms have significantly increased their and bond issuance activity of East Asian firms since equity and bond issuances abroad (Henderson et the early 1990s. We focus on this region because its al., 2006; Gozzi et al., 2010; Doidge et al., 2013). corporate issuances account for most of the capital Moreover, after the 2008-09 Global Financial Crisis, market activity in emerging regions. The amount of low interest rates in advanced economies have led to equity and bonds raised by East Asian firms during a boom in international bond issuances by emerging the 1990-2016 period accounted for about 70 percent economy firms (Shin, 2013; Chui et al., 2014; Turner, of the total amount raised by firms from emerging 2014; Acharya et al., 2015; McCauley et al., 2015; regions in domestic and international markets. Caballero et al., 2016; Bruno and Shin, 2017; Chang Furthermore, following the 1997-98 Asian Financial et al., 2017). Crisis, policy makers in the region have made a conscious effort to develop domestic markets, among Whereas the literature has systematically documented other initiatives, to decrease the reliance on financing the importance of international capital markets for from abroad and foreign currency instruments. emerging economy firms, the role of domestic markets Although our focus is on East Asia, we systematically has been largely overlooked. In this paper, we study (i) compare the patterns in this region with those in whether domestic activity can also explain the boom other emerging and advanced economies. in capital market financing in emerging economies, and (ii) whether domestic and international markets To conduct the analysis, we use transaction-level data act as complements or substitutes for firms in on equity and corporate bonds issued in domestic emerging economies. These issues are relevant and international (cross-border) markets over the The Rise of Domestic Capital Markets for Corporate Financing 11 Chapter 1 - Introduction period 1990-2016. The data include 124,390 security Second, along with the growth in the amount raised, issuances conducted by 22,945 firms from East Asian the extensive margin increased as more and smaller economies. The analysis focuses on the largest 10 firms in East Asia gained access to equity and bond economies in the region in terms of gross domestic markets. Driven by a higher participation of firms product (GDP). The data comprise firms listed in in domestic markets, the average number of issuing stock exchanges and unlisted firms. Including both firms per year in the median East Asian economy types of firms is important because most of the more than tripled, from 60 issuers in 1990-98 to 185 existing research on firms’ issuance activity focuses issuers in 2008-16. Because domestic markets cater only on listed firms, limiting the scope of the analysis. to smaller firms than international ones, the size of Whereas all equity issuers in our sample are listed the typical capital market issuer in East Asia declined firms, the latter account for only 40 percent of bond 38 percent between 1990-98 and 2008-16. These issuers. By excluding unlisted firms, other papers are patterns stand in contrast to those in other regions. In not only disregarding most of the corporate bond advanced and other emerging economies, the number issuers, but also are likely omitting relatively smaller of issuers has remained fairly constant and the size of firms. the typical issuer has increased over time. Our analysis yields the following interrelated Third, the relatively larger firms with access to findings. international markets have also benefited from the development of domestic markets in East Asia. First, driven by domestic rather than international Whereas the relatively smaller issuing firms rely issuances, the amount of financing raised in capital almost exclusively on domestic capital markets, the markets by East Asian firms has greatly increased largest firms raise funds in multiple markets: domestic since the 1990s. The total amount of equity and capital markets, international capital markets, bond financing raised per year (relative to GDP) in and syndicated loan markets. Access to different the median East Asian economy doubled between markets allows firms to mitigate negative shocks in the periods 1990-98 and 2008-16. As a result, the one market by raising more funds in other markets. relative size of capital market financing in East Asia When international debt markets collapsed during has become similar to that in advanced economies. the Global Financial Crisis, firms in East Asia moved The share of equity raised domestically per year in from international to domestic bond markets. This the median East Asian economy increased from 85 “spare tire” function was not present during the Asian to 97 percent between 1990-99 and 2008-16; that of Financial Crisis, when domestic capital markets were domestic bonds rose from 36 to 80 percent between less developed. the same periods. Because of the high correlation between issuance market and currency denomination, Fourth, the growth in domestic financing occurred the share of domestic currency bond financing while policy makers implemented a set of reforms also increased significantly. The larger reliance on to develop domestic capital markets after the domestic markets occurred both at the economy- Asian Financial Crisis. Aware that relatively large industry level and within firms. The patterns in East corporations are typically the main users of traditional Asia are similar to those in other emerging regions, capital markets, policy makers complemented these where domestic equity and bond activity has grown reforms with policies aimed at developing domestic relatively faster than international activity. However, capital markets for small and medium-sized the growth of domestic markets was more subdued enterprises (SMEs). Compared to those in other in other regions, which still conducted most of their regions, including advanced ones, SME markets have bond issuances abroad during 2008-16. become large in East Asia. By 2016, SME markets 12 The Rise of Domestic Capital Markets for Corporate Financing Chapter 1 - Introduction in the region were the largest in the world in terms bond issuances and, potentially, foreign currency risk. of market capitalization. However, the experience Our paper complements that literature by showing of China (mainland); Hong Kong SAR, China; and that domestic issuance activity by East Asian firms Taiwan, China suggests that SME markets tend to (the most active users of capital markets among serve few firms that, in some cases, are not SMEs, emerging economies) outpaced that in international but rather larger corporations. On the positive side, markets. As a result, most bond issuances during these markets seem to be providing financing to new 2008-16, across and within firms, took place in sectors that are not adequately served by traditional domestic markets. These trends hold for different markets. criteria used in the literature to define international issuances: residence of issuing firms, nationality of Our paper contributes to different strands of the issuing firms, and currency denomination. Thus, literature. these findings also show a greater reliance of East Asian firms on domestic currency financing. First, consistent with the literature on corporate financing mentioned in the first paragraph, our Second, our paper relates to research that tries to paper shows that bond issuance activity by emerging understand whether domestic and international economy firms accelerated after the Global Financial financial markets are substitutes or complements. Crisis. This literature associates the increasing The literature has argued that financial frictions can corporate debt levels in emerging economies post- lead to market segmentation, preventing some firms Global Financial Crisis with a surge in international and investors to participate in international financial The Rise of Domestic Capital Markets for Corporate Financing 13 Chapter 1 - Introduction markets. For instance, information asymmetries, tax Third, our paper adds to the literature that examines treatment, fixed transaction costs, and regulations can how financial development affects firms of different inhibit some firms from using certain markets and/or sizes. Research shows that relatively smaller firms result in certain investors and financial intermediaries benefit more from financial development than larger (with specific preferences, time horizons, or abilities ones (Guiso et al., 2004; Beck and Dermirguc-Kunt, to diversify risk) dominating specific markets (La 2006; Cetorelli and Strahan, 2006; Beck et al., Porta et al., 1997; Karolyi and Stulz, 2003; Pirinsky 2008; Ayyagari et al., 2016). The rationale behind and Wang, 2006; Japelli and Pagano, 2008; Bekaert this finding is that financial development is typically et al., 2011). Thus, even in an increasingly globalized associated with a reduction in financial frictions world in which financial transactions can take place (such as high transaction costs, lack of information anywhere, domestic intermediaries could play a sharing, or weak enforcement institutions), which are meaningful role for emerging economy firms. For particularly important for small firms. In line with example, a large literature finds that domestic and these arguments, our findings are consistent with the foreign banks complement each other by specializing fact that more developed domestic capital markets in different financial products and clients (Claessens, improve access to finance for smaller firms relatively 2016). more than for larger corporations. But not much is known about whether domestic Fourth, our paper complements a strand of literature and international capital markets behave in a that analyzes aggregate trends in East Asian financial complementary manner. Earlier studies argue that, markets. These studies find that financial markets as internationalization advances, trading activity for have expanded significantly after the Asian Financial large firms can shift away from domestic markets and Crisis and have become more diversified, as capital into international markets (Claessens et al., 2002; markets have grown faster than the banking sector Levine and Schmukler, 2006), whereas others find (Gosh, 2006; Estrada et al., 2010; Park, 2011; Mizen that internationalization has no effect on domestic et al., 2012; Cline, 2015; Dekle and Pundit, 2015; markets (Karolyi, 2004). Other papers argue that Kang et al., 2015). Nevertheless, none of these internationalization might indeed strengthen domestic studies has distinguished the use of domestic vis-à- capital markets, for example, by incentivizing them to vis international markets nor the number and types of become more efficient or by enhancing transparency issuers behind the expanding markets. (Smith and Sofianos, 1997; Hargis and Ramanlal, 1998; Hargis, 2000; Moel, 2001). Research also The remainder of the paper is organized as follows. shows that domestic and international markets Chapter 2 describes the data and methodology. complement each other by providing different types Chapter 3 documents the growth of domestic and of bonds (Gozzi et al., 2015). As firms switch across international equity and bond financing by East markets, the aggregate and firm-level amount of Asian firms. Chapter 4 analyzes three aspects of financing, debt maturity, and currency denomination firm financing associated with the growth in capital change, as witnessed during the Global Financial markets: the extensive margin, issuer size, and Crisis and during domestic banking crises (Cortina et financial market diversification. Chapter 5 discusses al., 2019). Our paper contributes to this literature by the possible role of the capital market reforms offering evidence that relatively developed domestic implemented after the Asian Financial Crisis and the capital markets can complement international ones, role of SME capital markets. Chapter 6 concludes. expanding access to financing for smaller firms and completing markets for relatively larger corporations. 14 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 2 Data and Methodology Data Sources and Sample 81,194 bond issuances over the sample period. To benchmark against other regions of the world, we To analyze the issuance activity in East Asia, also analyze data from other emerging economies (in we use comprehensive, transaction-level data on Eastern Europe and other Asia, Latin America, and equity and corporate bonds issued in domestic and the Middle East and Africa) and advanced economies international markets over the period 1990-2016. (in North America, Western Europe, and Japan). The data come from Thomson Reuters’ Security Appendix Table 1 provides the list of economies Data Corporation (SDC) Platinum, which provides included in each group. We focus the analysis on transaction-level information on new issuances of three periods, 1990-98, 1999-2007, and 2008-16, common and preferred equity, as well as publicly and so we can compare trends before and after the Asian privately placed bonds.1 Because the analysis focuses Financial Crisis and the Global Financial Crisis. All on corporate financing, we exclude all public-sector values are reported in millions of constant 2011 U.S. issuances, comprising issuances by national, local, dollars. and regional governments, government agencies, regional agencies, and multilateral organizations. We To account for the fact that our sample of countries also exclude mortgage-backed securities and other is heterogenous, we focus the analysis on the median asset-backed securities. economy. For the regressions we collapse data at the economy-industry-year level and include economy- In this paper, we cover the 10 largest economies in industry fixed effects.2 In this way, we make sure that East Asia (in terms of GDP): China, Hong Kong we are not simply capturing the trends in the largest SAR, Indonesia, Malaysia, the Philippines, the economy (China) or in the most financially developed Republic of Korea, Singapore, Taiwan, Thailand, economies in the sample (Hong Kong SAR, Korea, and Vietnam. The data set contains 22,945 unique and Singapore). Instead, our results show average firms issuing in capital markets and 124,390 security trends across equally-weighted East Asian economies. issuances, consisting of 43,196 equity issuances and For robustness, we repeated the whole analysis in the 1 Thomson Reuters’ Security Data Corporation is one of the most widely used databases on transaction-level research. Some prominent studies such as Henderson et al. (2006), Kim and Weisbach (2008), and Bruno and Shin (2017) use the same database. An alternative transaction-level database is Dealogic, which yields similar estimates of issuance activity. 2 This level of aggregation creates an unbalanced panel over 1990-2016. Only economy-industry-year observations with reported issuance activity (of any type) are included in the analysis. We divide industries across nine main categories by using the first digit of the Standard Industrial Classification (SIC) codes: agriculture, forestry, and finishing; mining; construction; manufacturing; transportation and utilities; wholesale trade; retail trade; finance, insurance, and real state; and other services. The Rise of Domestic Capital Markets for Corporate Financing 15 16 The Rise of Domestic Capital Markets for Corporate Financing Chapter 2 - Data and Methodology paper excluding China, Hong Kong SAR, Korea, and currency basis) and (ii) firms whose ultimate parent Singapore.3 The results are qualitatively similar to the is a non-financial sector firm (nationality basis). The ones reported in the paper. results for non-financial firms are very similar to the ones reported in the paper. Furthermore, the main We classify equity and corporate bond issuances as results of this paper are robust to excluding firms domestic or international using the residence-based with some degree of government ownership, which approach followed by the Bank of International include stated-owned enterprises (SOEs). These firms Settlements (BIS). We compare the location of the accounted for 18 percent of the total issuance activity issuance with the residence of the issuing firm (Gruić by East Asian firms during the sample period. The and Wooldridge, 2012). Domestic securities are, results also hold for firms with some degree of thus, those issued by residents in their local markets. government ownership, excluding the rest. International issuances are those issued by residents abroad. Using this methodology, the data set includes To compare the evolution of capital markets with 38,386 (71,489) equity (bond) issuances in domestic bank financing, some of the analysis uses syndicated markets and 4,810 (9,703) equity (bond) issuances in loan data, which also come from SDC. Unlike typical international markets. bank loans, transaction-level syndicated loans are available for all economies. Moreover, syndicated Besides the residence-based approach, the literature loan markets capture a sizable share of bank financing uses two alternative criteria to classify international and are the most relevant comparison to capital and domestic corporate bond issuances: the markets in terms of transaction size (amount raised nationality-based and currency-based approaches per issuance) and terms of financing such as debt (Gruić and Wooldridge, 2012; Shin, 2013; Avdjiev maturity (Ivashina and Scharfstein, 2010; Cerutti et al., 2014; McCauley et al., 2015). The nationality- et al., 2015). The syndicated loan data include 9,606 based approach considers the nationality of a firm issuing firms and 25,493 issuances. To distinguish instead of its residence. Therefore, issuances by a between domestic and international (cross-border) subsidiary of a foreign-owned firm in the domestic syndicated loans, we compare the nationality of the market are considered international, as the parent lead bank that arranges the deal with the residence company resides outside the domestic market. of issuing firms. Domestic loans are those in which Under the currency-based approach, debt issuances only domestic banks lead the syndication, whereas denominated in foreign currency are considered international syndicated loans entail the participation international, and those in local currency as domestic. of at least one foreign bank acting as a lead arranger. Because our paper focuses on the role of domestic markets for firms located in East Asia, we use the classification of issuances by the residence approach Measure of Firm Size as our main results. But for robustness, we also use the nationality-based and currency-based approaches To study the types of firms issuing in domestic and to estimate the growth of domestic vis-à-vis international markets over time, we focus on size. We international bond issuances. The results are robust to follow the literature that typically uses firm size or using these two alternative measures. collateral to measure financial access across firms or over time (Beck and Dermirguc-Kunt, 2006; Beck et Following the literature, we also repeated the analysis al., 2008; Campello and Larrain, 2016; de la Torre for (i) non-financial sector issuers (residence and et al., 2017). In addition, we are interested in size 3 Data for Korea seem to have poor coverage before 1994 because the reported data on bond issuances increases 57-fold during 1993-94. Therefore, we also repeated the whole analysis of the paper after excluding all issuance activity from Korea during 1990-93. The results are almost identical. The Rise of Domestic Capital Markets for Corporate Financing 17 Chapter 2 - Data and Methodology because there is evidence that, due to large fixed costs, To check that our results on firm size are not specific only large firms have access to international markets to the proxy we use, we also explored two alternative (Pagano et al., 2002; Claessens and Schmukler, measures of firm size from Worldscope data for 2007). listed firms. In particular, we used total assets and net sales, taking the values reported by firms in The literature on firms’ issuance activity tends to their end-of-year balance sheets. Both sets of results study the size of issuers through balance sheet data, with the alternative measures are qualitatively and using for example firm assets.4 The downside of quantitatively similar to the ones reported in the this approach is that balance sheet data are usually paper. That is, the size of listed firms issuing in capital available for firms listed in stock exchanges, but not markets, in terms of assets and sales, follows the same for unlisted firms that conduct issuances. This issue trend as the size of firms based on issuance volume. is not trivial because most corporate debt issuers are unlisted (Table 1).5 We thus use an alternative measure of size that is comparable across firms and covers the whole universe of issuers. We proxy firm size by the average amount raised per issuance, measured over all issuances per firm during the entire 1990-2016 period. To make sure that the average amount raised is a good proxy for issuer size, we plot the average amount raised and the average assets (also from SDC) for listed firms. The scatter plot shows a high correlation between the two size variables (Appendix Figure 1, Panel A). Regressions of the log of average assets on the log of the average amount raised per issuance yield a point estimate of 0.99, not statistically different from one but statistically different from zero. To the extent that a similar correlation exists for unlisted firms, the average amount raised should be a good proxy for the analysis of issuer size. A comparison of the firm size distribution (FSD) of listed and unlisted bond issuers illustrates the importance of using a comprehensive and complete measure of firm size. The FSD of unlisted bond issuers lies to the left of that of listed issuers across the bottom quantiles, indicating that the smallest firms tapping bond markets are unlisted (Appendix Figure 1, Panel B). This confirms that if we were to use assets to measure firm size and only cover listed firms, we would be disregarding the smallest users of bond markets. 4 See, for example, Pagano et al. (2002), Kim and Segal (2009), Adrian et al. (2013), Didier et al. (2015), Becker and Ivashina (2014), and Bruno and Shin (2017). 5 This statement holds when considering as “listed firms” subsidiaries owned by listed parent companies. 18 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 3 Capital Market Financing The Rise of Equity and Bond Financing emerging economies. However, the value still lags that in advanced economies. The patterns in capital Since the early 1990s, firms in East Asia have market financing in East Asia contrast with those in significantly increased the amount of funds raised in syndicated loan financing, where the annual amount capital markets. In the median East Asian economy, the raised as a ratio to GDP has fallen over time.6 average amount of capital raised per year through equity and bonds increased by factors of 2 and 5, respectively, The expansion of capital market activity by East between the periods 1990-98 and 2008-16. Asian firms is also evident when analyzing the more widely used indicator of market capitalization Although East Asian economies grew fast over the (Figure 1, Panel B). Stock and corporate bond market sample period, capital market financing increased capitalization (as a ratio of GDP) have significantly even faster, especially in bond markets. The amount expanded in the region since the 1990s and, as a raised in equity per year increased from 1.3 percent result, amounts outstanding have become similar to to 1.6 percent of GDP between the periods 1990-98 those in advanced economies. In addition, East Asian and 2008-16 (Figure 1, Panel A). The annual amount corporate capital markets have grown relatively faster raised in equity to GDP in East Asia was the highest than corporate bank credit, suggesting a trend toward among advanced and emerging regions for every more diversified financing sources. Note, however, period in our sample. The amount raised through that market capitalization can be driven not only by bond issuances has grown significantly faster. The growth in issuances but also by revaluation of asset total amount raised in bonds per year increased from prices. 1.6 percent to 4.5 percent of GDP between 1990- 98 and 2008-16. In other words, bond financing was about three times equity financing in 2008- Domestic vs. International Markets 16, whereas in 1990-98 both values were roughly the same. The ratio of the amount raised in bonds To formally assess the growth in equity and bond to GDP is also significantly larger than in other issuance activity in East Asia and examine to what 6 Although there is considerable heterogeneity in the levels of issuance activity across economies in East Asia, the reported trends tend to hold across them (Appendix Figure 2). The Rise of Domestic Capital Markets for Corporate Financing 19 Chapter 3 - Capital Market Finnacing extent domestic and international issuances have the reliance on domestic currency bond financing by driven this growth, we estimate panel ordinary least East Asian firms at the economy-industry level has squares (OLS) regressions of the log (1+the annual increased significantly over time. amount raised) by each industry in each East Asian economy during 1990-2016 on dummy variables for As the amount issued in domestic markets grew faster the periods 1999-2007 and 2008-16.7 We use the than the amount issued internationally, the share period 1990-98 as the base, so we omit the dummy of capital market financing obtained domestically for these years. The regressions include economy- increased (Figure 2). In particular, the share of industry fixed effects to control for differences across equity raised domestically per year by the median economies and industries that are constant over time. East Asian economy increased from 85 percent of the We cluster standard errors at the economy-industry total during 1990-98 to 97 percent during 2008-16. level, as we do for other regressions in the paper. We In bond markets, international issuances dominated estimate separate models for total, domestic, and during the pre-crisis period. However, this trend international issuances. reversed in the 2000s and bond raising activity by East Asian firms now takes place predominantly in The estimated coefficients imply that the total amount domestic markets. The share of bond financing raised raised in equity and bonds by East Asian firms at in domestic markets was 36 percent in 1990-98, 65 the economy-industry level has increased over time percent in 1999-07, and 80 percent in 2008-16.8 (Table 2, Panel A). In the period 2008-16, the annual amount raised per economy-industry in equity and The patterns of equity financing in East Asia are bonds was about 180 percent and 277 percent higher similar to those in other regions, where equity is than in 1990-98, respectively. The expansion of also predominantly raised in domestic markets and domestic issuance activity has been the main driver the share of domestic equity financing has increased of this growth. Between the periods 1990-98 and over time. The evidence also suggests that domestic 2008-16, the annual amount raised domestically per bond activity has grown relatively faster than the economy-industry increased 187 percent in equity international activity in other emerging economies. and 381 percent in bonds. International issuances However, in contrast to East Asia, other regions have also grown during the last sample period, which still conducted most of their bond issuances in is consistent with the literature, but this growth was international markets during 2008-16. much slower than the growth of domestic issuances. The annual amount raised per economy-industry in To formally show the shift in the composition from international equity and bond markets increased 73 international to domestic markets in East Asia at percent and 58 percent, respectively, between 1990- the economy-industry level, we estimate panel OLS 98 and 2008-16. regressions of the share of the total amount raised in domestic markets per economy, industry, and For corporate bonds, we repeat the analysis using year during 1990-2016 on dummy variables for the the two alternative definitions of international bond periods 1999-2007 and 2008-2016 (Table 3, Panel A). issuances described in the data section: by nationality We analyze separately equity and bonds, including of issuers and by currency denomination (Table economy-industry fixed effects. In the period 1990- 2, Panel B). The estimates are fairly robust. The 98, the average share of equity and bonds raised per alternative estimates show that domestic issuances year in domestic markets across economy-industries have been the main driver of the growth in corporate was 72 percent and 21 percent, respectively. The bond raising activity. Our results also indicate that estimates for equity issuances imply that this share 7 The dummies take value one for each year in the corresponding period and zero otherwise. 8 The trend of a growing share of equity and bonds raised in domestic markets tends to hold for every East Asian economy (Appendix Figure 3). 20 The Rise of Domestic Capital Markets for Corporate Financing The Rise of Domestic Capital Markets for Corporate Financing 21 Chapter 3 - Capital Market Finnacing experienced no growth in 1999-2007; but it increased was already high in 1990-98. In that period, this to 91 percent in 2008-16. For bond issuances, the share was 89 percent and increased to 92 percent in share of domestic issuances increased to 49 percent in 2008-16. In contrast, the average fraction of bonds 1999-2007 and to 69 percent in 2008-16. issued domestically per firm greatly increased over time. This share increased by 28 percentage points, We then examine whether the switch toward domestic from 39 percent in 1990-98 to 67 percent in 2008- capital markets not only occurred within industries 16. For robustness, we also run non-weighted OLS but also within firms (Table 3, Panel B). Namely, we regressions. Although these regressions yield similar estimate panel regressions of the share of the total results to the ones reported, the coefficient estimates raised in domestic markets per firm and year during are slightly smaller (Appendix Table 2). This means 1990-2016 on dummy variables for the periods 1999- that the within-firm switch from international to 2007 and 2008-2016. We estimate separate models domestic markets was less prominent in relatively for equity and bonds, including firm fixed effects. In larger economies, such as China and Korea. this way, we focus on within firm changes over time, disregarding the compositional changes in the set of firms raising new capital, that is, different firms issuing in different markets at different points in time. A relevant issue when running regressions at the firm level is that the number of issuers varies significantly across economies. For example, China and Korea accounted for 75 percent of the total number of East Asian issuers during 2008-16. Thus, the estimation results could be driven by the trends in those economies with relatively more issuers. We address this issue by estimating weighted least squares (WLS) regressions. In particular, we assign each firm-year observation a weight equal to , with Nit being the total number of issuers per economy-industry i and period t (1990-98, 1999-2007, and 2008-16). The sum of the weights of all observations per economy, industry, and period equals one, which means that every economy-industry has the same weight in the regressions. Using this method, economies with relatively more issuers do not have relatively more weight and, instead, our results show average trends across equally-weighted East Asian economies. The regression results imply that part of the overall switch toward domestic markets occurred within firms (Table 3, Panel B). The average share of equity issued domestically (rather than internationally) per firm slightly increased over time, although it 22 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 4 Firms Using Capital Markets N ext, we examine three aspects through which much over time, the number of domestic issuers the expansion of domestic capital markets has substantially expanded (Figure 3, Panel B). The might have impacted firm financing: the number of issuers per year in domestic equity and extensive margin, issuer size, and financial market bond markets increased almost three-fold and six- diversification. fold, respectively, between 1990-98 and 2008-16. The number of international issuers per year increased for equity (though the level is still relatively small) and Extensive Margin declined for bonds. The growth in the amount raised in East Asian capital Regressions at the economy-industry level provide markets has been accompanied by an expansion in robust evidence of the reported growth in the extensive the extensive margin. In other words, an increasing margin. We estimate panel OLS regressions of the number of firms have been using capital markets to log (1+the number of issuers) per economy, industry, obtain financing over the years. In the median East and year during 1990-2016 on dummy variables for Asian economy, the average number of yearly issuers the periods 1999-2007 and 2008-16, in addition to per period has more than tripled from 60 to 185 issuers economy-industry fixed effects. The estimates imply between 1990-98 and 2008-16 (Figure 3, Panel A). that, on average, the number of yearly issuers expanded This overall pattern holds for equity and bond markets, considerably within industries. In particular, the and contrasts with that in other emerging and advanced number of equity and corporate bond issuers per year economies, where the level of yearly issuers and its more than doubled between 1990-98 and 2008-16 growth over time were significantly lower. (Table 4). For equity, the number of domestic and international issuers increased over time, with the A broader use of domestic rather than international former growing significantly faster. Regarding bonds, markets seems to be behind the overall increase in only domestic markets show a statistically significant the number of issuing firms in East Asia. Whereas growth in the number of yearly issuers, fully driving the number of international issuers did not increase the aggregate patterns within this instrument.9 9 Although not reported, the intensive margin (changes in the amount raised within firms) yields a more nuanced picture. For equity, we do not find a change in the amount raised per firm, either domestically or internationally. For bonds, the amount raised per firm increased over time in both domestic and international markets. The Rise of Domestic Capital Markets for Corporate Financing 23 Chapter 4 - Firms Using Capital Markets Issuer Size of domestic markets is clearly driving this pattern: the size of domestic issuers has fallen over time As the extensive margin expanded over time, whereas the size of international issuers, if anything, smaller firms have accessed capital markets to raise has increased. In the case of equity, the issuer size funds (Figure 4). The size of the median issuer in declined for both domestic and international issuers. the median East Asian economy has consistently However, it is important to consider that international declined over time within equity and corporate bond equity issuers account for a very small fraction of the markets. Specifically, the size of the typical equity and total number of equity issuers. In the last period of bond issuer declined by 60 percent and 30 percent, our sample (2008-16), firms issuing international respectively, between 1990-98 and 2008-16. This equity accounted for about 9 percent of the total pattern contrasts with other emerging and advanced equity issuers in the median East Asian economy. economies, where the median issuer size has tended Thus, changes in the size of domestic issuers are to increase over time. most likely driving the trends in equity markets. For robustness, we run regressions using total assets of Because domestic markets attract relatively smaller listed firms (instead of our proxy based on issuance firms than international markets, the fall in the size size), which show an even larger decline in the size of of issuers could be a consequence of the broader use equity and bond issuers between 1990-98 and 2008- of domestic markets. In particular, firms issuing 16 (Appendix Table 3). domestic equity and bonds are about 30 percent the size of those issuing international securities (Figure 5).10 Thus, the FSD of domestic issuers is more left Financial Market Diversification skewed than that of international issuers. So far, the analysis has shown how an increasing To formally assess the changes in issuer size over number of relatively smaller firms seem to have time, we estimate panel OLS regressions of the size of benefited from the development of domestic capital equity and corporate bond issuers in East Asia during markets in East Asia. But we are also interested in 1990-2016 on dummy variables for the periods 1999- determining whether the larger corporations already 2007 and 2008-16. These regressions also include using capital markets have benefited from this economy-industry fixed effects. The dependent development as well. On the one hand, these firms variable is the log of size of the median issuer per have access to international markets and might not economy, industry, and year. Therefore, we make sure rely much on domestic capital markets. On the other that each economy-industry-year observation has the hand, even if these firms use international markets, same weight in the regression and that industries in they might still use domestic capital markets to countries with more issuing firms do not drive the diversify their sources of financing and mitigate results. shocks in other markets. The estimates show that the median size of issuing To better understand the role of domestic capital firms declined in equity and bond markets relative to markets in East Asia, we study how these markets the 1990-98 period (Table 5). Mirroring the overall are used vis-à-vis other markets across two different statistics presented above, the size of the typical issuer dimensions: (i) the cross-sectional size distribution of per economy-industry declined by around 59 percent issuers and (ii) during normal vs. crisis periods. To in equity markets and by 33 percent in bond markets do this, we compare the funding in capital markets between 1990-98 and 2008-16. For bonds, the use with that in syndicated loans markets. These types 10 We define domestic issuers as firms that issue equity or debt in domestic markets only. International issuers are firms that issue capital in international markets at least once over the sample period. 24 The Rise of Domestic Capital Markets for Corporate Financing Chapter 4 - Firms Using Capital Markets of loans pool funds from several banks to lend large to bond markets to withstand credit supply shocks on amounts of credit and are the main alternative to the banking sector. Taking a more global perspective, corporate bond financing in terms of issuance size Cortina et al. (2019) show how firms also switch and debt maturity. With syndicated loans included between international and domestic debt markets into the sample, we have six different markets that during periods of financial crises. This behavior is can be simultaneously analyzed: domestic equity, consistent with the view that capital markets can act international equity, domestic bonds, international as a spare tire, providing financing when the banking bonds, domestic syndicated loans, and international sector is in crisis (Greenspan, 1999; Levine et al., syndicated loans. 2016). Market access varies significantly across firm size. Following this research, we study changes in debt Whereas the relatively smaller issuers depend almost issuance composition across markets for East Asian entirely on domestic equity and bond markets, larger firms around the 1997-98 Asian Financial Crisis and firms tend to use a wider set of instruments, issued in the 2008-09 Global Financial Crisis. The spare tire different locations. We classify issuers into ten deciles function of alternative debt markets was not observed by firm size and examine the share of firms, per decile, during the Asian Financial Crisis, perhaps because issuing in different markets (Figure 6). In the first domestic capital markets were not as developed then decile (the smallest issuers), 97 percent of the firms (Figure 7, Panel A). However, a broader access to are domestic equity and/or domestic bond issuers, domestic markets over time seems to have allowed whereas only 7 percent of those firms issue in other firms to move across different markets during the markets. Relatively larger firms also use domestic Global Financial Crisis. As the crisis hit syndicated capital markets, but they seem to raise capital across loan and international bond markets, East Asian markets in a more balanced manner. For instance, 46 firms turned to domestic bond markets (Figure 7, percent of firms in the tenth decile (the largest firms) Panel B). While the number of total syndicated loan use domestic capital markets, 21 percent use domestic and international bond issuances declined by 20 syndicated loans, 7 percent use international equity, percent and 30 percent, respectively, during 2008-09, 17 percent use international bonds, and 34 percent domestic corporate bond issuances expanded by 110 use international syndicated loans. The fact that the percent. Because of this movement toward domestic sum of different types issuers is close to 100 percent in bond markets, the total number of debt issuances the first decile means that most of the smallest issuing (bonds plus syndicated loans) did not decline. The firms stick to only one (domestic) market.11 Because movement toward domestic bond markets is even smaller firms are typically younger, this pattern of larger when focusing only on those firms issuing debt financing across firm size is consistent with a pecking in international markets before the crisis (Figure 7, order that suggests that firms use domestic markets Panel C).13 These firms increased their domestic bond first and, then, access international and syndicated issuances by 150 percent, while declining issuances loan markets at a later stage, when they are larger.12 in all the other markets. That is, international debt issuers, which are the relatively larger corporations, Access to various markets can be beneficial because, shifted toward domestic bond markets during the when the supply of funds from specific markets Global Financial Crisis. declines, firms can compensate by raising more funds in less affected markets. Adrian et al. (2013) and Becker and Ivashina (2014) provide evidence that firms in the United States switch from syndicated loan 11 The sum of these percentages does not need to be 100 percent because some firms in each decile can issue in more than one market at the same time and thus belong to more than one group of issuers. 12 There is a very high correlation between firm size (in terms of assets) and age. Using the Worldscope data on listed East Asian firms, a 1 percent increase in age is associated with a 0.5 percent increase in size. 13 To compute this panel, we only keep firms that issued international debt at least once before 2008. The Rise of Domestic Capital Markets for Corporate Financing 25 26 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 5 The Role of Policies Capital Market Reforms The implementation of these reforms over time does not show a clear pattern. These reforms were not The observed expansion of domestic equity and bond concentrated in a specific period, but instead were markets in East Asia occurred while economies in the implemented throughout the entire period following region implemented several policies to develop their the Asian Financial Crisis. In addition, the different capital markets in the aftermath of the Asian Financial categories of reforms were not implemented in a Crisis. The goal of these policies was to diversify sequential manner. In other words, economies did not financial markets and reduce their dependence on follow a path in which they put in place reforms of a bank lending, which was an important factor leading certain type first and then moved on to other types to the crisis.14 of reforms. To get a sense of the numerous and different types As a result, credibly estimating the effect of reforms of capital market reforms implemented in East on domestic capital market growth constitutes a Asia, we gather information on the policies issued challenge. Because policy reforms are dispersed by authorities in Indonesia, Korea, Malaysia, the throughout the entire 1997-2016 period, it is not Philippines, and Vietnam.15 Overall, we compile 68 possible to establish pre- and post- reform periods capital market reforms which we classify into three and compare the trends of issuance activity between categories based on their goal: (i) expansion of the the two. For the same reason, evaluating the impact investors base (e.g., allowing the entry of foreign of individual policies is difficult, because an increase investors or creating new types of investors, such as in issuance activity after a policy was implemented pension or mutual funds), (ii) improvement of market could be explained by other policies implemented infrastructure (e.g., introducing new instruments or around the same years. Reverse causality is another launching new exchanges), and (iii) enhancement of potential problem. We do not know whether issuance investors protection (e.g., enacting new regulations or activity increased as a result of exogenous policies improving corporate governance practices). being implemented, or policy makers reacted by 14 Kawai (1998), Corsetti et al. (1999), Radelet and Sachs (2000), Geithner (2007), and Park et al. (2017), among others, discuss the role of banks during the Asian Financial Crisis. 15 Appendix Tables 4 to 8 include the list of reforms in each economy for which we were able to obtain information. To compile these reforms, we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. The Rise of Domestic Capital Markets for Corporate Financing 27 Chapter 5 - The Role of Policies introducing reforms in anticipation to an expansion in 2013, Singapore in 2007, Thailand in 1999, and in issuance activity by firms. Vietnam in 2009. Even in those economies where SME markets were already in place before the Although we cannot formally identify the causal crisis (Korea, Malaysia, and Taiwan), policy makers impact of policy reforms in East Asia due to the introduced new reforms in the post-crisis period. nature of the data, there seems to be a link between The efforts to promote SME markets were in line the implementation period of these reforms and the with similar initiatives in other regions. For example, rise of domestic capital markets. The security market Argentina, Brazil, Canada, India, Nigeria, Poland, reforms index constructed by Abiad et al. (2010) South Africa, Turkey, and the United Kingdom, shows improvements in capital markets after the among many others, have established SME capital Asian Financial Crisis, but not before. In general, markets since the 1990s. The European Union also there is a strong and positive correlation between established its own SME regional market in 2005 the implementation of reforms and domestic capital (WFE, 2015). market development (La Porta et al., 2000; Henry and Lorentzen, 2003; Burger and Warnock, 2012). Capital markets for SMEs in East Asia are relatively Reforms such as the ones implemented in East Asia large when compared to SME markets in other regions are usually needed for capital markets to flourish and (Figure 8, Panel A). The median SME market in East for firms to raise funds in those markets. It is likely Asia has a market capitalization equivalent to 4.2 that they have made capital markets in the region percent of GDP, compared to 1.4 percent in advanced more attractive to firms as well as investors and, as a economies and less than 1 percent in other emerging result, have promoted their use. regions. However, there is wide heterogeneity in size across East Asian economies. The size of SME markets as a ratio of GDP ranges from 15.9 percent in SME Capital Markets Taiwan to only 0.1 percent in the Philippines (Figure 8, Panel B). Our analysis so far has covered developments in the traditional capital markets in East Asia, which only To analyze financing patterns in East Asian SME large corporates tend to use even though the size of capital markets, we gather data on SME markets in firms has declined over time. Thus, policy makers in China (SME Board, ChiNext, and NEEQ ), Hong the region have complemented the above-mentioned Kong SAR (GEM), and Taiwan (TPEx). We focus reforms with efforts to expand access by developing on these markets because they have become large alternative capital markets targeted at SMEs. These relative to other SME markets in the region and SME markets try to attract smaller firms by, for around the world. Furthermore, because we have data example, reducing fees, offering less stringent listing at the firm level, we can examine the characteristics and disclosure requirements, and appointing advisors of issuers and compare issuers in traditional and SME that help firms navigate the listing process, among markets. The SME Board (established in 2004) and other measures. ChiNext (established in 2009) in China function as part of the Shenzhen Stock Exchange, which along In most East Asian economies, SME markets were with Shanghai is one of the largest exchanges in established after the Asian Financial Crisis. For the economy. The SME Board is targeted at mature example, China established its first SME market SMEs, whereas ChiNext is aimed at emerging start- in 2004, Hong Kong SAR in 1999, the Philippines ups, particularly high-tech firms. Like ChiNext, 28 The Rise of Domestic Capital Markets for Corporate Financing The Rise of Domestic Capital Markets for Corporate Financing 29 Chapter 5 - The Role of Policies NEEQ is oriented toward small, high-tech firms. the median firm issuing in GEM and NEEQ has This exchange, which started as a pilot project in around 100 employees, which according to standard 2006 and became nationwide in 2013, operates as definitions, can be classified as an SME.16 On the an independent over-the-counter market. GEM was other hand, although firms issuing in ChiNext have established in 1999 as part of the Hong Kong Stock less assets than those in China’s traditional markets, Exchange and is directed toward firms with high they are still very large corporations. With a median growth potential that do not satisfy the profitability firm size of $124 million and 673 employees, firms or track record requirements to be listed in the main accessing ChiNext are significantly above the usual market. In Taiwan, TPEx was created in 1994 as an thresholds to define SMEs. With a median size of independent over-the-counter market dedicated to $234 million and 1,502 employees, firms accessing promoting SMEs and microenterprises as well as the SME Board tend to be even larger than those emerging and high-tech industries. accessing traditional markets. The final data set contains annual data on the volume Capital markets for SMEs in China, Hong Kong of equity issuances and the number of equity issuers SAR, and Taiwan are financing different sectors over 2004-16. We choose 2004 as the first year in our than traditional markets do (Figure 9). In traditional sample to adequately compare trends in China’s SME markets, the manufacturing sector and the finance, markets with those in Hong Kong SAR and Taiwan. insurance, and real estate sector dominate. These two We omit from the analysis the few bond issuances sectors combined account for 71 percent, 73 percent, that occur in SME markets because they take place and 89 percent of the amount raised in the traditional sparsely and only in specific markets. In addition, we markets of China, Hong Kong SAR, and Taiwan, use balance sheet data for 5,914 issuing firms: 810 respectively. In SME markets, the manufacturing firms in the SME Board, 570 firms in ChiNext, 3,971 sector is also relevant, but the finance, insurance, firms in NEEQ , 188 firms in GEM, and 375 firms and real estate sector is significantly smaller. In turn, in TPEx. Data come from Wind Data Feed Service SME markets are characterized by a large presence of (Wind) and the official website of each exchange. issuers dedicated to “other services,” which together with manufacturing are the largest sectors in terms of These data show that few firms are participating in amounts issued. The other services sector accounts for SME markets (Table 6). The number of issuing firms 48 percent of the amount raised in GEM, 33 percent per year in the SME Board, ChiNext, and GEM is in ChiNext, 32 percent in NEEQ , 16 percent in the around 100, about one-third of the number of issuers SME Board, and 14 percent in TPEx. This sector in traditional markets. The number of issuers is is mostly composed of information technology (IT) relatively larger in NEEQ (1,217 issuers) and TPEx firms, which is probably related to the fact that SME (395). However, even for these two markets, the markets are particularly targeted toward high-tech number of issuers is very small when compared to firms. In contrast to SME markets, issuance activity the total universe of SMEs in China (11.7 million in by firms dedicated to other services is relatively low in 2013) and Taiwan (1.4 million in 2016). traditional markets, accounting for 6 percent or less of the total amount raised. Whereas in some cases these markets are effectively serving SMEs, in others they are serving rather large corporations (Table 6). The median issuer in GEM, NEEQ , and TPEx has $13 million, $25 million, and $40 million in assets, respectively. Moreover, 16 For example, the World Bank defines SMEs as firms with fewer than 300 employees. For the Organisation for Economic Co-operation and Development (OECD), SMEs are firms with fewer than 250 employees. In general, the threshold for a firm to be defined as an SME ranges between 100 and 500 employees across economies (Ayyagari et al., 2007). 30 The Rise of Domestic Capital Markets for Corporate Financing CHAPTER 6 Conclusions S ince the 1990s, East Asian firms have issuances is much lower in emerging economies increased their issuance activity in capital outside East Asia. markets, most notably, in domestic markets during the 2000s. As the amount raised has grown The significant expansion and large size of domestic faster domestically than internationally, domestic capital markets in East Asia seem to provide several markets have become the predominant place where benefits. We find that domestic capital markets equity and bonds are issued and local currencies the attract more and smaller firms than international predominant denomination of bond contracts. In markets. Thus, as domestic markets grew, the size addition, the number of East Asian firms issuing in of issuing firms declined and the extensive margin domestic markets has significantly increased over expanded. In addition, domestic capital markets time, whereas the number of international issuers has diversify the financing sources for larger corporations remained stagnant. and can act as a spare tire, helping to mitigate shocks in international markets. Furthermore, because of the These findings bring new insights to the literature on high correlation between the currency denomination corporate financing in emerging economies. Whereas of bonds and the market of issuance, these findings international capital markets have indeed been imply a shift toward domestic currency financing in an important contributor to the corporate finance emerging economies. This shift could mitigate, at least boom that started in the 1990s, domestic markets in relative terms, the existing concerns that currency have played an even more important role in the new risk in the corporate sector of emerging economies millennium. Although the evidence used in this paper has expanded in recent years (Chui et al., 2014; IMF, focuses extensively on East Asia, the region accounts 2015). On the other hand, the boom in corporate for the bulk of the capital raising activity in emerging bond financing over the last decade is driving the economies. Moreover, the data indicate that domestic increasing level of debt, which is growing faster than issuance activity has also grown relatively faster than GDP. This credit growth is raising concerns related international activity in other emerging economies. to declines in lending standards and increasing risk However, the relative importance of domestic taking (IMF, 2018; McKinsey, 2018). The Rise of Domestic Capital Markets for Corporate Financing 31 Chapter 6 - Conclusions Our analysis raises some relevant questions about many small firms and whether these reasons lie on domestic capital markets that could be explored in the supply or the demand side of funds. Answers to future research. these questions might provide insights on how these markets could be improved. Alternative instruments, First, an interesting question is why domestic capital such as securitization or mini-bonds, might be more markets in East Asia have developed so much. effective at promoting capital market financing for Domestic capital market growth in East Asia occurred SMEs. while policy makers implemented a series of capital market reforms. But identifying whether specific Third, even if only relatively few firms use domestic policy reforms helped to jump start this process is capital markets, their actions can produce positive not an easy task. East Asian economies implemented spillovers for non-issuing firms. For example, as more reforms of diverse kinds over an extended period. It firms turn to capital markets for funds, the demand might be the case that no single reform was more for bank financing from these firms might drop, relevant than others. Instead, the whole reform freeing funds that can be channeled toward other process might have acted as a signal to the market (arguably smaller) corporations. Moreover, there is that policy makers were committed to developing evidence that firms issuing in capital markets can domestic capital markets. This commitment, in turn, act as financial intermediaries, raising funds at low could have encouraged more firms and investors to interest rates in these markets and then on-lending use these markets. A related question is what types the proceeds at higher rates, perhaps “crowding in” of investors are behind this development. It might be smaller firms (Caballero et al., 2016; Bruno and Shin, the case that as savings increased in the region and 2017). It would be useful to examine to what extent domestic institutional investors were established, these spillovers to non-issuers and smaller firms are more domestic funds became available in domestic present. markets. Another possibility is that, following the reforms aimed at liberalizing markets and lowering the restrictions to foreign investors, the foreign participation in East Asian stock and bond markets increased. In sum, further analysis on the impact of capital market reforms in East Asia is needed. Second, the evidence presented in this paper shows that, although the expansion of domestic capital markets seems to bring new financing to more firms over time, the direct benefits appear to be directly accrued by relatively few firms. Most SMEs do not use capital market financing even when SME markets are in place. Thus, it would be worth examining the reasons why SME markets seem to fail to attract 32 The Rise of Domestic Capital Markets for Corporate Financing References Abiad A., E. Detragiache, and T. Tressel. 2010. “A New Dataset on Chui, M., I. Fender, and V. Sushko. 2014. “Risks Related to Financial Reforms.” IMF Staff Papers, 57 (2): 281-302. 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Panel A shows, for the median economy in each region and period, the amount of equity, corporate bonds, and syndicated loans raised per year as a percentage of GDP. Panel B shows, for the median economy in each region and period, the average size of financial markets as a percentage of GDP. In Panel B, “equity” refers to stock market capitalization, “corporate bonds” to the amount outstanding of domestic private bonds, and “banks” to the amount oustanding of private credit granted by domestic banks. The market capitalization data come from the World Bank Financial Development and Structure Dataset (version June 2017). A. Total Amount Raised 10% 8% 6% Share of GDP 4% 2% 0% 1999-2007 2008-2016 1990-1998 1990-1998 2008-2016 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 East Asia Eastern Europe and Latin America Middle East and Africa Advanced economies other Asia Equity Corporate bonds Syndicated loans B. Market Capitalization 120% 100% 80% Share of GDP 60% 40% 20% 0% 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 East Asia Eastern Europe and Latin America Middle East and Africa Advanced economies other Asia Equity Corporate bonds Banks 36 The Rise of Domestic Capital Markets for Corporate Financing Appendix Figure 2. Share of Domestic and International Issuances This figure shows, for the median economy in each region and period, the share of the total amount raised per year in domestic and international markets. Domestic issuances are those conducted by firms in their home economy. International issuances are those conducted by firms outside their home economy. A. East Asia 100% 10% 3% 90% 16% 19% 31% 80% Share of the total raised 70% 61% 60% 50% 97% 85% 87% 40% 80% 65% 30% 20% 36% 10% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 Equity Corporate bonds B. Emerging Economies 100% 6% 90% 20% 31% 80% Share of the total raised 70% 60% 83% 50% 100% 96% 94% 40% 80% 69% 30% 20% 10% 17% 0% 4% 1999-2007 2008-2016 1990-1998 1990-1998 1999-2007 2008-2016 Equity Corporate bonds C. Advanced Economies 100% 5% 12% 90% 19% 80% Share of the total raised 70% 54% 68% 60% 90% 50% 95% 88% 40% 81% 30% 20% 46% 32% 10% 10% 0% 1999-2007 2008-2016 1990-1998 1990-1998 1999-2007 2008-2016 Equity Corporate bonds Domestic markets International markets The Rise of Domestic Capital Markets for Corporate Financing 37 Appendix Figure 3. Number of Issuing Firms This figure shows the growth in the number of issuing firms over 1990-2016. Panel A shows, for the median economy in each region and period, the average number of firms issuing equity and/or corporate bonds per year. Panel B shows, for the median East Asian economy in each period, the average number of firms issuing equity and corporate bonds per year in domestic and international markets. A. Number of Issuing Firms 200 180 160 140 Number of firms 120 100 185 80 137 60 40 71 60 58 63 20 13 3 8 0 1999-2007 2008-2016 1999-2007 1990-1998 1999-2007 1990-1998 1990-1998 2008-2016 2008-2016 East Asia Emerging economies Advanced economies B. Number of Issuing Firms in East Asia: Domestic and International Markets 120 3 10 100 80 Number of firms 12 60 104 95 40 1 9 69 20 35 14 34 13 0 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 Equity Corporate bonds Domestic markets International markets 38 The Rise of Domestic Capital Markets for Corporate Financing Appendix Figure 4. Size of Issuing Firms This figure shows, for the median economy in each region and period, the size of the median firm issuing equity and corporate bonds. Firm size is measured as the average amount raised per issuance over the whole sample period, 1990-2016. Values are reported in millions of constant 2011 U.S. dollars (USD). 250 200 Million USD 150 100 50 0 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 East Asia Emerging economies Advanced economies Equity Corporate bonds The Rise of Domestic Capital Markets for Corporate Financing 39 Appendix Figure 5. Firm Size Distribution: Domestic and International Issuers This figure compares the size of East Asian firms issuing in domestic and international markets. Panels A and B show the firm size distribution of domestic and international equity and corporate bond issuers. Densities are estimated using the Epanechnikov kernel function. Panel C shows, for the median East Asian economy, the size of the median firm issuing in domestic and international markets. Firm size is measured as the average amount raised per issuance over the whole sample period, 1990-2016. Firm size values are reported in millions of constant 2011 U.S. dollars (USD). A. Equity Issuers 0.30 0.25 0.20 Density 0.15 0.10 0.05 0.00 -2 0 2 4 6 8 Log of issuer size B. Corporate Bond Issuers 0.30 0.25 0.20 Density 0.15 0.10 0.05 0.00 -2 0 2 4 6 8 Log of issuer size Domestic Issuers International Issuers C. Median Firm Size per Market (Million USD) Equity market Corporate bond market Domestic International Domestic International $16 $59 $32 $95 40 The Rise of Domestic Capital Markets for Corporate Financing Appendix Figure 6. Use of Different Markets by Firm Size This figure shows the share of East Asian firms issuing in different markets: domestic equity, domestic bonds, domestic syndicated loans, international equity, international bonds, and international syndicated loans. Issuing firms are classified into ten deciles according to their size. The first decile contains the smallest issuers and the tenth decile the largest issuers. Firm size is measured as the average amount raised per issuance over the whole sample period, 1990-2016. 70% 60% Share of total issuing firms per decile 50% 40% 30% 20% 10% 0% 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Firm decile Domestic equity Domestic bonds Domestic syndicated loans International equity International bonds International syndicated loans The Rise of Domestic Capital Markets for Corporate Financing 41 Appendix Figure 7. Issuance Activity during Crises This figure shows the percent change in the number of corporate bond and syndicated loan issuances by East Asian firms in domestic and international markets around the Asian Financial Crisis (1997-98) and the Global Financial Crisis (2008-09). Issuance data are aggregated in two-year periods around the Asian Financial Crisis (1995-96, 1997-98, 1999-2000) and the Global Financial Crisis (2006-2007, 2008-09, 2010-11). Panel A and Panel B use data on all issuers around crises. Panel C only keeps firms that issued international debt at least once before 2008. A. Asian Financial Crisis 150% Domestic bonds 120% International bonds Percent change issuances 90% Domestic syndicated loans International syndicated loans 60% Total debt 30% 0% 1995-1996 1997-1998 1999-2000 -30% -60% -90% B. Global Financial Crisis 150% 120% Percent change issuances 90% 60% 30% 0% 2006-2007 2008-2009 2010-2011 -30% -60% -90% C. Global Financial Crisis, International Issuers 150% 120% Percent change issuances 90% 60% 30% 0% 2006-2007 2008-2009 2010-2011 -30% -60% -90% 42 The Rise of Domestic Capital Markets for Corporate Financing Appendix Figure 8. Size of SME Capital Markets This figure shows the size of SME markets in different regions. Panel A shows the market capitalization as a ratio of GDP for the median SME market in each region. Eastern Europe and other Asia includes BSE SME (India), SME Emerge (India), Innovations and Investment Market (Russian Fed.), and Second National Market (Turkey). Latin America includes Pyme Board (Argentina) and Bovespa Mais (Brazil). Middle East and Africa includes NILEX (Egypt), Development Market and Growth Market (Morocco), Nigerian Stock Exchange (Nigeria), Alternative Exchange (South Africa), Development Capital Market (South Africa), and Venture Capital Market (South Africa). Advanced economies include TSX Venture (Canada), Emerging Companies Market (Cyprus), Entry Standard (Germany), ATHEX Alternative Market (Greece), Enterprise Securities Market (Ireland), Euro MTF (Luxembourg), JASDAQ (Japan), Mothers (Japan), First North (Norway), Oslo Axess (Norway), MAB Expansion (Spain), AIM (United Kingdom), and NYSE MKT (United States). East Asia includes the SME markets listed in Panel B, which in turn shows each market capitalization as a ratio of GDP. Data are at year- end 2016 or latest available. The market capitalization data come from the own exchanges and the World Federation of Exchanges (WFE). A. Market Capitalization in Selected Regions 5% 4.2% 4% Share of GDP 3% 2% 1.4% 1% 0.08% 0.02% 0.02% 0% East Asia Eastern Europe and Latin America Middle East and Africa Advanced economies other Asia B. Market Capitalization in East Asian Economies 18% 15.9% 15% 13.3% 12.5% 11.8% 12% Share of GDP 9% 7.1% 5.5% 6% 2.9% 3% 1.4% 1.6% 0.2% 0.7% 0.1% 0% KONEX (Korea, Rep.) UPCOM (Vietnam) SGX Catalist (Singapore) Mai (Thailand) NEEQ (China) ChiNext (China) KOSDAQ (Korea, Rep.) SME Board (Philippines) ACE Market (Malaysia) GEM (Hong Kong, SAR) SME Board (China) TPEx (Taiwan) The Rise of Domestic Capital Markets for Corporate Financing 43 Appendix Figure 9. Amount Raised by Sector: Traditional vs. SME Capital Markets This figure shows, for each market, the share of the total equity raised by each sector during 2004-16. Only data on IPO issuances are included for TPEx. Other services include: business services, hotels, health services, legal services, and repair services, among other professional services. Other sectors include: agriculture, forestry, and fishing; construction; mining; and wholesale and retail. A. Traditional Markets 100% 3% 14% 13% 90% 6% 3% 5% 6% 80% 10% 9% 28% Share of the total equity raised 70% 60% 27% 50% 51% 40% 30% 61% 44% 20% 10% 22% 0% China Hong Kong, SAR Taiwan B. SME Markets 100% 8% 4% 12% 90% 17% 21% 14% 1% 80% 33% 1% Share of the total equity raised 16% 32% 70% 3% 1% 60% 48% 6% 4% 2% 50% 40% 24% 80% 4% 30% 56% 54% 18% 20% 29% 10% 13% 0% SME Board ChiNext NEEQ GEM TPEx China Hong Kong, SAR Taiwan Manufacturing Finance, insurance, and real estate Transportation and utilities Other services Other sectors 44 The Rise of Domestic Capital Markets for Corporate Financing Appendix Table 1. Summary Statistics This table shows the total number of firms, number of issuances, and amount raised per market in East Asia during 1990- 2016, as well as the percentages that correspond to listed firms. The latter are those that appear listed in public stock exchanges at least once during the sample period. Unlisted firms are the rest of the firms. Amount raised values are reported in billions of constant 2011 U.S. dollars (USD). A. Equity Amount raised Number of firms Number of issuances (billion USD) Type of issuer Total % Listed Total % Listed Total % Listed Domestic equity 12,000 100% 38,386 100% $2,465 100% International equity 1,860 100% 4,810 100% $770 100% Total equity 13,860 100% 43,196 100% $3,236 100% B. Corporate Bonds Amount raised Number of firms Number of issuances (billion USD) Type of issuer Total % Listed Total % Listed Total % Listed Domestic corporate bonds 10,861 35% 71,489 46% $6,595 43% International corporate bonds 2,223 55% 9,703 42% $1,451 49% Total corporate bonds 13,084 38% 81,194 45% $8,046 44% C. Syndicated Loans Amount raised Number of firms Number of issuances (billion USD) Type of issuer Total % Listed Total % Listed Total % Listed Domestic syndicated loans 3,933 14% 10,112 32% $1,355 26% International syndicated loans 5,653 26% 15,316 38% $2,705 36% Total syndicated loans 9,606 21% 25,493 36% $4,075 33% The Rise of Domestic Capital Markets for Corporate Financing 45 Appendix Table 2. Issuance Activity This table shows OLS (ordinary least squares) regressions of the log of (1+amount raised) through equity and bonds per East Asian economy, industry, and year during 1990-2016 on two period dummies (1998-2007 and 2008-16). The regressions estimate total, domestic, and international issuances separately. Panel A classifies domestic and international equity and bond issuances by the residence of the issuing firm. Panel B classifies domestic and international bond issuances by (i) the nationality of the issuing firm (parent company) and (ii) the currency denomination of the issuance. The regressions include economy-industry fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.  A. Equity and Corporate Bonds Dependent variable: log (1+amount raised) per economy, industry, and year Type of instrument: Equity Corporate bonds Base period: 1990-98 Total Domestic International Total Domestic International Period 1999-07 0.58 *** 0.48 *** 0.64 *** 1.18 *** 2.03 *** -0.08 [0.16] [0.17] [0.18] [0.19] [0.22] [0.18] Period 2008-16 1.80 *** 1.87 *** 0.73 *** 2.77 *** 3.81 *** 0.58 ** [0.16] [0.15] [0.25] [0.28] [0.31] [0.25] Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 2,079 2,079 2,079 2,079 2,079 2,079 No. of clusters 90 90 90 90 90 90 R-squared 0.58 0.55 0.50 0.60 0.61 0.54 B. Corporate Bonds: Alternative Definitions of International Issuances Dependent variable: log (1+amount raised) per economy, industry, and year Alternative definition: Nationality of issuer Currency denomination Base period: 1990-98 Total Domestic International Total Domestic International Period 1999-07 0.23 1.68 *** -0.79 *** 1.18 *** 2.05 *** -0.10 [0.14] [0.24] [0.26] [0.19] [0.21] [0.19] Period 2008-16 1.25 *** 3.13 *** -0.24 2.77 *** 3.73 *** 0.78 *** [0.18] [0.29] [0.29] [0.28] [0.30] [0.25] Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 1,429 1,429 1,429 2,079 2,079 2,079 No. of clusters 85 85 85 90 90 90 R-squared 0.69 0.59 0.52 0.60 0.60 0.54 46 The Rise of Domestic Capital Markets for Corporate Financing Appendix Table 3. Share Raised in Domestic Markets This table shows regressions estimating changes in the share of the total amount raised in domestic equity and corporate bond markets in East Asia over time. Column A reports OLS regressions of the share of the total amount raised in domestic markets per economy, industry, and year during 1990-2016 on two period dummies (1998-2007 and 2008-16). The “mean, 1990-98” estimates correspond to the average of the annual share of equity/bonds raised domestically across economy- industry observations during 1990-98. Column B reports WLS  (weighted least squares) regressions of the share of the total amount raised in domestic markets per firm and year during 1990-2016 on two period dummies (1998-2007 and 2008-16). The “mean, 1990-98” estimates correspond to the weighted average of the annual share of equity/bonds raised domestically across firms during 1990-98. Each observation is weighted by one over the total number of equity/bond issuers per economy, industry, and period. The sum of the weights of all observations per economy, industry, and period equals one. The regressions include, alternatively, economy-industry fixed effects (FE) and firm fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** denote statistical significance at 10%, 5%, and 1%, respectively. Level of aggregation: A. Economy-Industry B. Firm Share of the total raised in domestic Share of the total raised in domestic Dependent variable: markets per economy, industry, and year markets per firm and year Type of instrument: Equity Corporate bonds Equity Corporate bonds Mean, 1990-98: 0.72 0.21 0.89 0.39 Period 1999-07 0.04 0.28 *** 0.02 0.22 *** [0.03] [0.03] [0.01] [0.04] Period 2008-16 0.19 *** 0.48 *** 0.03 ** 0.28 *** [0.03] [0.03] [0.01] [0.05] Economy-industry FE Yes Yes No No Firm FE No No Yes Yes No. of observations 2,079 2,079 22,594 21,827 No. of clusters 90 90 87 80 R-squared 0.23 0.41 0.86 0.73 The Rise of Domestic Capital Markets for Corporate Financing 47 Appendix Table 4. Extensive Margin: Number of Firms Issuing This table shows OLS regressions of the log of (1+the number of issuers) in equity and corporate bond markets per East Asian economy, industry, and year during 1990-2016 on two period dummies (1998-2007 and 2008-16). The regressions estimate total, domestic, and international issuers separately. The regressions include economy-industry fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. Dependent variable: log (1+number of issuers) per economy, industry, and year Type of instrument: Equity Corporate bonds Base period: 1990-98 Total Domestic International Total Domestic International Period 1999-07 0.51 *** 0.47 *** 0.19 *** 0.34 *** 0.53 *** -0.06 [0.08] [0.09] [0.05] [0.06] [0.07] [0.05] Period 2008-16 1.06 *** 1.02 *** 0.35 *** 1.03 *** 1.25 *** 0.11 * [0.09] [0.09] [0.09] [0.11] [0.13] [0.06] Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 2,079 2,079 2,079 2,079 2,079 2,079 No. of clusters 90 90 90 90 90 90 R-squared 0.71 0.69 0.59 0.68 0.64 0.65 48 The Rise of Domestic Capital Markets for Corporate Financing Appendix Table 5. Size of Equity and Corporate Bond Issuers This table shows OLS regressions of the size of East Asian equity and corporate bond issuers during 1990-2016 on two period dummies (1999-07 and 2008-16). The dependent variable is the median issuer size (in logs) per economy, industry, and period. Firm size is measured as the average amount raised per issuance over the whole sample period, 1990-2016. The regressions include economy-industry fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** denote statistical significance at 10%, 5%, and 1%, respectively.  Dependent variable: size (in logs) of the median issuing firm per economy, industry, and period Type of instrument: Equity Corporate bonds Base period: 1990-98 Total Domestic International Total Domestic International Period 1999-07 -0.43 *** -0.44 *** -0.18 0.06 0.03 0.23 * [0.09] [0.09] [0.23] [0.10] [0.11] [0.12] Period 2008-16 -0.59 *** -0.56 *** -0.70 *** -0.33 *** -0.30 *** 0.14 [0.11] [0.11] [0.25] [0.12] [0.11] [0.15] Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 253 252 175 246 234 217 No. of clusters 88 88 70 88 87 80 R-squared 0.86 0.84 0.71 0.80 0.79 0.69 The Rise of Domestic Capital Markets for Corporate Financing 49 Appendix Table 6. Traditional vs. SME Capital Markets This table shows indicators on equity issuers in traditional and SME capital markets in China, Hong Kong SAR, and Taiwan. Assets and the number of employees of issuing firms correspond to the median equity issuer. Firm-level data are averages across all years per firm. Values for the traditional markets, SME Board, GEM, and TPEx are for the period 2004-16. Values for ChiNext are for the period 2009-16 and values for NEEQ are for the period 2013-16. Only data on IPO issuances are included for TPEx. Amount raised and asset values are reported in millions of constant 2011 U.S. dollars (USD). Amount raised Assets of Number of Number of firms per year issuing firms employees of Market issuing per year (million USD) (million USD) issuing firms Traditional markets China 317 72,095 214 1,359 Hong Kong SAR 362 61,763 116 643 Taiwan 158 5,945 68 448 SME markets SME Board (China) 124 18,355 238 1,502 ChiNext (China) 116 12,070 124 673 NEEQ (China) 1,217 10,169 13 135 GEM (Hong Kong SAR) 101 1,094 25 104 TPEx (Taiwan) 395 655 40 n/a 50 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Figure 1. Firm Size Proxy Panel A shows, for publicly listed East Asian firms, the correlation between asset size and issuance size. Assets (in logs) and amount raised (in logs) are the average within firms over the whole sample period, 1990-2016. Panel B shows the firm size distribution of listed and unlisted corporate bond issuers in East Asia. Firm size (in logs) is the average amount raised per issuance over the whole sample period, 1990-2016. Densities are estimated using the Epanechnikov kernel function. Listed firms are those that appear as listed in public stock exchanges at least once during the sample period. Unlisted firms are the rest of the firms. A. Average Assets vs. Average Amount Raised 16 14 12 Log of average assets 10 8 y = 0.99x + 1.98 6 4 2 0 -4 -2 0 2 4 6 8 10 -2 -4 Log of average amount raised Equity issuer Bond issuer B. Firm Size Distribution of Listed and Unlisted Bond Issuers 0.30 0.25 0.20 Density 0.15 0.10 0.05 0.00 -2 0 2 4 6 8 Log of issuer size Unlisted firms Listed firms The Rise of Domestic Capital Markets for Corporate Financing 51 Appendix Appendix Figure 2. Growth in Equity and Bond Financing: East Asian Economies This figure shows the evolution of capital markets and banks over 1990-2016. Panel A shows, for each East Asian economy and period, the amount of equity, corporate bonds, and syndicated loans raised per year as a percentage of GDP. Panel B shows, for each East Asian economy and period, the average size of financial markets as a percentage of GDP. In Panel B, “equity” refers to stock market capitalization, “corporate bonds” to the amount outstanding of domestic private bonds, and “banks” to the oustanding amount of private credit granted by domestic banks. The market capitalization data come from the World Bank Financial Development and Structure Dataset (version June 2017). A. Total Amount Raised 31% 20% 18% 16% 14% 12% Share of GDP 10% 8% 6% 4% 2% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 2008-2016 2008-2016 2008-2016 2008-2016 China Hong Kong, Indonesia Korea, Rep. Malaysia Philippines Singapore Taiwan Thailand Vietnam SAR Equity Corporate bonds Syndicated loans B. Market Capitalization 502% 1014% 300% 250% 200% Share of GDP 150% 100% 50% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 2008-2016 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 2008-2016 1999-2007 1990-1998 2008-2016 2008-2016 1999-2007 China Hong Kong, Indonesia Korea, Rep. Malaysia Philippines Singapore Thailand SAR Equity Corporate bonds Banks 52 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Figure 3. Share of Domestic and International Issuances: East Asian Economies This figure shows, for each East Asian economy and period, the share of the total amount raised per year in domestic and international markets. Domestic issuances are those conducted by firms in their home economy. International issuances are those conducted by firms outside their home economy. A. Equity 100% 90% 80% Share of the total raised 70% 60% 50% 40% 30% 20% 10% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 China Hong Indonesia Korea, Rep. Malaysia Philippines Singapore Taiwan Thailand Vietnam Kong, SAR B. Corporate Bonds 100% 90% 80% Share of the total raised 70% 60% 50% 40% 30% 20% 10% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 2008-2016 China Hong Indonesia Korea, Rep. Malaysia Philippines Singapore Taiwan Thailand Vietnam Kong, SAR Domestic markets International markets The Rise of Domestic Capital Markets for Corporate Financing 53 Appendix Appendix Table 1. Economy Classification This table shows the list of economies that are included in the different regions. Emerging economies Advanced East Asia Eastern Europe and Middle East and Latin America economies other Asia Africa China Bangladesh Argentina Bahrain Austria Hong Kong SAR Bulgaria Brazil Egypt, Arab Rep. Belgium Indonesia India Chile Jordan Canada Korea, Rep. Kazakhstan Colombia Kuwait Cyprus Malaysia Pakistan Costa Rica Morocco Denmark Philippines Romania Mexico Nigeria Finland Singapore Russian Federation Panama Oman France Taiwan Sri Lanka Peru Qatar Germany Thailand Turkey Venezuela, RB Saudi Arabia Greece Vietnam Ukraine South Africa Ireland, Rep. Tunisia Italy United Arab Emirates Japan Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom United States 54 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Table 2. Share Raised in Domestic Markets This table shows OLS regressions of the share of the total amount raised in domestic markets per East Asian firm and year during 1990-2016 on two period dummies (1998-2007 and 2008-16). The regressions include firm fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** denote statistical significance at 10%, 5%, and 1%, respectively. Share of the total raised in Dependent variable: domestic markets per firm and year Type of instrument: Equity Corporate bonds Period 1999-07 0.02 ** 0.11 ** [0.01] [0.05] Period 2008-16 0.02 ** 0.17 *** [0.01] [0.06] Firm FE Yes Yes No. of observations 22,594 21,827 No. of clusters 87 80 R-squared 0.87 0.69 The Rise of Domestic Capital Markets for Corporate Financing 55 Appendix Appendix Table 3. Size (Assets) of Equity and Corporate Bond Issuers This table shows OLS regressions of the size of East Asian equity and corporate bond issuers during 1990-2016 on two period dummies (1999-07 and 2008-16). The dependent variable is the median issuer size (in logs) per economy, industry, and period. Firm size is measured as the average assets size of firms at issuance over the whole sample period, 1990-2016. The firm size variable is winsorized at the 5% level to remove outliers, as the difference in size across firms in terms of assets is very large. The regressions include economy-industry fixed effects (FE). Standard errors are reported in brackets and are clustered at the economy-industry level. *, **, and *** denote statistical significance at 10%, 5%, and 1%, respectively. Dependent variable: size (in logs) of the median issuing firm per economy, industry, and period Type of instrument: Equity Corporate bonds Base period: 1990-98 Total Domestic International Total Domestic International Period 1999-07 -0.64*** -0.51*** -0.71*** -0.27** -0.24* 0.01 [0.12] [0.11] [0.24] [0.11] [0.13] [0.13] Period 2008-16 -0.93*** -0.80*** -0.87*** -0.50*** -0.33** 0.04 [0.13] [0.13] [0.28] [0.14] [0.14] [0.14] Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 250 249 161 233 219 192 No. of clusters 87 87 64 82 80 72 R-squared 0.79 0.76 0.82 0.81 0.79 0.86 56 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Table 4. Capital Market Reforms – Indonesia This table shows the capital market reforms in Indonesia since the 1997-98 Asian Financial Crisis. To compile these reforms we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. Type of policy Year Improvement Enhancement Policy description Expansion of of market of investor investor base infrastructure protection 1997 Revocation of stock purchase limit by foreign investors 1997 Regulation of assets-backed securities 2006 Regulation of existing sharia capital market Merge of Jakarta Stock Exchange and Surabaya Stock 2007 Exchange 2008 Establishment of Indonesia Bond Pricing Agency 2011 Enactment of law on Financial Services Authority (OJK) 2012 Establishment of OJK 2013 Development of capital market data warehouse system Enactment of regulation to facilitate share buybacks under 2013 fluctuating market conditions Facilitatation of settlement of transactions using custodian 2013 banks 2013 Launch of investor protection fund 2013 Establishment of single investor identity 2014 Implementation of new lot sizes and price fractions 2014 Enactment of OJK regulation on sustainable public offering Launch of roadmap to good corporate governance for 2014 issuers and public companies 2015 Regulation of exchange-traded funds 2015 New regulation of the sharia capital market Launch of issuers reporting system through extensible 2015 business reporting language 2016 Launch of electronic licensing and registration system 2016 Launch of integrated investment management system 2016 Establishment of Indonesia securities financing 2016 Launch of investor alert portal The Rise of Domestic Capital Markets for Corporate Financing 57 Appendix Appendix Table 5. Capital Market Reforms – Korea, Rep. This table shows the capital market reforms in Korea, Rep. since the 1997-98 Asian Financial Crisis. To compile these reforms we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. Type of policy Year Improvement Enhancement Policy description Expansion of of market of investor investor base infrastructure protection Elimination of restrictions on investments by foreign 1998 investors 1998 Introduction of mutual funds 1998 Introduction of asset-backed securities 1998 Enhancement of corporate governance practices 1999 Introduction of mark-to-market system 2000 Approval of inter-dealer brokers to act as intermediares Enactment of Indirect Investment Asset Management 2004 Business Act 2005 Introduction of retirement pension system 2005 Launch of Korea Exchange (KRX) Enactment of Financial Investment Services and Capital 2007 Markets Act 2012 Launch of Korean hedge funds 2012 Removal of limit on corporate bond issuances amounts Adoption of individual savings account (ISA), allowing 2015 individuals to invest in various financial products through a single account 58 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Table 6. Capital Market Reforms – Malaysia This table shows the capital market reforms in Malaysia since the 1997-98 Asian Financial Crisis. To compile these reforms we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. Type of policy Year Improvement Enhancement Policy description Expansion of of market of investor investor base infrastructure protection 2000 Release of Malaysian code on corporate governance 2003 Streamline of IPO approval process 2003 Standarization of lot sizes 2003 Demutualistion of Kuala Lumpur Stock Exchange (KLSE) Enactment of revised guidelines on the offering of private 2004 debt securities 2004 Immediate approval of bond issues for selected issuers 2004 Enhancement of corporate disclosure Facilitatation of foreign-owned firms listings on domestic 2006 markets 2007 Enhancement of corporate governance provisions 2007 Enactment of Capital Markets and Services Act 2007 2008 Introduction of greenshoe mechanism 2009 Reduction of cost of regulatory compliance Establishment of credit guarantees for lower-rated firms 2009 issuing bonds 2009 Comprehensive revamp of Malaysia exchange structure 2012 Introduction of retail investors to corporate bond market The Rise of Domestic Capital Markets for Corporate Financing 59 Appendix Appendix Table 7. Capital Market Reforms – Philippines This table shows the capital market reforms in the Philippines since the 1997-98 Asian Financial Crisis. To compile these reforms we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. Type of policy Year Improvement Enhancement Policy description Expansion of of market of investor investor base infrastructure protection Provision of self-regulatory organization status to the 1998 Philippine Stock Exchange (PSE) 2000 Enactment of securities regulation code Issuance of circulars promulgating the code of corporate 2002 governance Obligation of compliance with international financial 2004 reporting standards (IFRS) 2006 Introduction of bond exchange/swaps Introduction of corporate securities in Philippine Dealing 2007 and Exchange (PDeX) trading board Enactment of Personal Equity and Retirement Account 2008 (PERA) Law Authorization of corporate bond trading for public through 2008 accredited brokers on PDeX 2008 Removal of documentary stamp taxes on securities trading Enactment of regulation requiring listed companies to 2010 maintain a ten percent public float Enactment of rules and regulations on exchange-traded 2013 funds Implementation of rules and regulations of the securities 2015 regulation code 2016 Approval of public-private partnership (PPP) listing rules Launch of corporate governance code for publicly listed 2016 companies 60 The Rise of Domestic Capital Markets for Corporate Financing Appendix Appendix Table 8. Capital Market Reforms – Vietnam This table shows the capital market reforms in Vietnam since the 1997-98 Asian Financial Crisis. To compile these reforms we received help from the World Bank Office of the Chief Economist for East Asia and Pacific and financial sector experts in the region. Type of policy Year Improvement Enhancement Policy description Expansion of of market of investor investor base infrastructure protection 2000 Launch of Ho Chi Minh City Stock Exchange (HOSE) 2005 Launch of Hanoi Stock Exchange (HNX) 2006 Authorization of domestic bond issuances for companies 2007 Enactment of Securities Law