Policy Research Working Paper 8844 The Rise of Domestic Capital Markets for Corporate Financing Lessons from East Asia Facundo Abraham Juan J. Cortina Sergio L. Schmukler Development Economics Development Research Group May 2019 Policy Research Working Paper 8844 Abstract Firms from emerging economies have significantly increased shows that an expansion in domestic bond issuances, in the amount of bond financing, particularly after the Global domestic currency, by more and smaller firms was the main Financial Crisis and when compared to other financing component behind the overall growth in bond financing. instruments. The literature links this growth to a rise in This expansion was accompanied by a decline in bond international bond issuances as the supply of capital by yields, higher firm leverage, and higher cash accumulation foreign investors expanded. This paper explores the role following issuances after 2008. The evidence is consistent of domestic markets by comparing domestic and interna- with a higher supply of funds by domestic investors being tional bond issuances by East Asian firms, which are the an important driver behind the rise in domestic bond most active bond issuers in emerging economies. The paper financing. This paper is a product of the Development Research Group, Development Economics. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at fabraham@worldbank.org, jcortinalorente@worldbank.org, and sschmukler@worldbank.org. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team The Rise of Domestic Capital Markets for Corporate Financing: Lessons from East Asia Facundo Abraham Juan J. Cortina Sergio L. Schmukler * Updated October 2020 JEL Classification Codes: F33; G00; G01; G15; G21; G23; G31 Keywords: corporate bond markets; domestic markets; firm financing; institutional investors; international financial markets; syndicated loan markets * We are grateful to Ashraf Bin Arshad, Irina Astrakhan, Ana Maria Aviles, Thorsten Beck (the Editor), Anderson Caputo, Jian Chen, Jose de Luna Martinez, Tatiana Didier, Catiana Garcia-Kilroy, Aart Kraay, Norman Loayza, Andrew Mason, Sudhir Shetty, two anonymous referees, 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) for helpful comments and data. We are grateful to Marta Guasch for excellent research assistance. We received financial support from the World Bank East Asia and Pacific Region, the Finance, Competitiveness, and Innovation Global Practice at the Malaysia Knowledge and Research Hub, the Knowledge for Change Program, the Research Support Budget, and the Strategic Research Program. Email addresses: fabraham@worldbank.org; jcortinalorente@worldbank.org; sschmukler@worldbank.org. 1. Introduction Firms in emerging economies have significantly increased the amount of financing raised in bond markets during the 1990s and 2000s, following the financial liberalizations that started in the early 1990s (World Bank, 2005). International issuance activity was a key component of this expansion before the 2008-09 Global Financial Crisis (GFC). International issuances further accelerated after the GFC, driven by foreign investors searching for yield in emerging market securities and generating favorable liquidity conditions. This increase in international bond issuances contributed to a surge in corporate debt and corporate vulnerability in emerging economies (IMF, 2015, 2019). In this paper, we use the experience of East Asia to study the role of domestic bond markets vis-à-vis international ones. Whereas an extensive literature has documented the trends in international issuances, especially after the GFC, less is known about the domestic issuance activity by emerging market firms. Our analysis of the role of domestic markets is two-fold. First, we examine the growth in bond issuance activity in both domestic and international markets since the 1990s, changes in the relative size of these markets over time, and the firms behind the capital raising activity in each market. Second, we examine whether the evolution of domestic bond issuances after the GFC was more likely driven by changes in the behavior of investors (supply side of capital) or firms (demand side of capital), as well as the implications of increased bond issuances for firms. The distinction between international and domestic market issuance activity is important because it is unclear ex ante to what extent emerging market firms have been using domestic markets. In an increasingly globalized world where financial transactions can take place anywhere, access to international financial markets allows firms to raise capital and trade their securities abroad and domestic investors to buy those securities in international markets, bypassing domestic markets (Henderson et al., 2006; Gozzi et al., 2010). Therefore, preference for deeper and more liquid international bond markets might have translated into more irrelevant domestic markets (Claessens et 1 al., 2002; Levine and Schmukler, 2006). On the other hand, even when barriers to financial transactions are removed, frictions (such as information asymmetries, fixed transactions costs, or tax treatments) can still cause market segmentation to persist (La Porta et al., 1997; Karolyi and Stulz, 2003; Pirinsky and Wang, 2006; Bekaert et al., 2011; Colla et al., 2013). Therefore, market specific developments can be important for firms and investors participating in those markets. We focus on East Asia for different reasons. First, corporate issuances in East Asia account for most of the capital market activity in emerging economies as a whole. The amount of bonds raised by East Asian firms during 1990-2016 accounted for about 70 percent of the total amount raised by firms from emerging regions in domestic and international markets. Second, East Asia weighs heavily in international benchmark indexes, which international investors widely use to allocate funds across economies (The Economist, 2019). This interest by international investors might push firms to raise capital in international markets in detriment of domestic markets. Third, following the 1997-98 Asian Financial Crisis (AFC), policy makers in the region have made a conscious effort to develop domestic bond markets as an alternative to international financing. By comparing bond issuance activity in East Asia with that in other regions, we can examine how international and domestic markets have developed over time, whether they act as substitutes or complements, and how the supply and demand of capital behave when financing takes place in different markets. To perform the analysis on issuance activity and types of issuing firms, we use transaction- level data on corporate bonds issued in domestic and international (cross-border) markets over 1990- 2016. The data include 81,194 bond issuances conducted by 13,084 firms from East Asian economies. The analysis focuses on the largest 10 economies in the region in terms of gross domestic product (GDP). We account for the heterogeneity in these economies by computing the main patterns in the paper for different country groups and by estimating trends at the economy-industry level and using fixed effects, such that large economies do not drive the results. The data comprise the universe of 2 East Asian issuers, including firms listed in stock exchanges and unlisted firms. To explore which investors purchased the issued securities, we analyze the portfolios of mutual, pension, and insurance funds using data at the security level. To examine how firms used the funds raised in domestic markets, we merge the transaction-level data with firm-level balance sheet and income statement data. The evidence shows that the most significant part of the expansion in bond issuance activity between 1990 and 2016 occurred in domestic bond markets, especially after 2008, surpassing the activity in international markets. The annual amount raised in domestic (international) bonds increased by about 381 (58) percent between 1990-98 and 2008-16. As a result, the share of bond financing obtained domestically increased over time, becoming firms’ main source of bond financing since 2008. Between 1990-98 and 2008-16, the average share of domestic bonds relative to the total annual amount raised (domestic plus international bonds) increased from 21 to 69 percent. Most of the bonds raised since 2008 were denominated in domestic currencies. Moreover, this growth in domestic markets comprised the participation of more and smaller issuing firms. The annual number of issuing firms in domestic bond markets increased 125 percent and the size of the typical issuer of domestic bonds declined by 30 percent when comparing 1990-98 and 2008-16. Instead, the number of issuing firms and the size of the typical issuer in international markets barely changed between these two periods. We then study whether the acceleration in domestic bond issuances in 2008-16 was more likely driven by an increased appetite for domestic bonds by investors (supply-side expansion) or by a higher demand of capital by firms (demand-side expansion). If a supply-side expansion by investors seeking to buy bonds was the main force behind the acceleration in domestic bond financing, we could observe a decline in bond issuance yields, higher leverage growth for new (smaller) issuers relative to recurrent (larger) issuers, and an accumulation of issuance proceeds in cash as firms took advantage of favorable liquidity conditions to raise more debt than the amount needed to finance existing operations. If, on the other hand, an increasing demand for capital by firms was the main factor behind the acceleration 3 in bond issuances, we might see that domestic bond yields increased (to the extent that other factors remained constant), a similar movement of yields in other debt markets where firms borrowed, similar increases in leverage across borrowing firms, and that firms utilized most of the bond proceeds. We find that the rise in East Asian domestic bond markets occurred while bond yields substantially declined. East Asian firms issued domestic corporate bonds in 2008-16 at a cost 42 percent lower (measured as the yield to maturity) than in 2000-07. In contrast, yields of international bond issuances declined by 29 percent, whereas the cost of borrowing from banks through syndicated loans increased. Domestic investors, with substantial and growing funds, increased their investment in domestic markets and were the main buyers of domestic securities, contributing to the decline in the cost of capital in those markets. Our results also show that the developments in domestic markets had important implications for issuing firms. In particular, the new firms that started issuing bonds in domestic markets in 2008- 16 accumulated debt faster than assets, increasing their leverage positions more than firms that had already issued bonds prior to 2008. Although these firms increased their investments, their financial performance worsened relative to the period prior to 2008, as measured by the interest coverage ratio (ICR) and return on equity (ROE). Furthermore, the relatively cheaper domestic bond financing was associated with high cash accumulation by the bond issuers. In particular, cash accumulation was the most important use of funds for bond issuers (about 40 cents per dollar raised) and the average amount of cash saved per bond issuance was significantly higher in 2008-16 than in previous years. Overall, our evidence is consistent with a supply-side expansion by domestic investors being the main force driving the rise of domestic bond markets in East Asia since the GFC, impacting the firms that gained access to that type of financing. Our paper contributes to the growing literature studying the rise of corporate debt in emerging economies since the GFC. This literature associates the increase in corporate debt with a surge in 4 international bond issuances as a result of an expansion in the supply side of capital by foreign investors that lowered the cost of capital in international markets (Shin, 2014; Turner, 2014; McCauley et al., 2015; Caballero et al., 2016; Burger et al., 2018a). There is evidence that emerging market firms kept large amounts of international bond issuance proceeds in cash (Bruno and Shin, 2017; Calomiris et al., 2019). The literature mentions at least two reasons to explain why firms might save a large share of issuance proceeds in cash during favorable liquidity conditions generated by supply-side expansions. One reason is that a lower cost of capital prompts firms to borrow more than the amount needed to finance existing operations, saving a large fraction of the proceeds in cash for precautionary motives or for future operations (Erel et al., 2012; Xiao, 2018; Acharya et al., 2020). The other reason is that international issuers could exploit carry trade opportunities by issuing debt in foreign currency at low rates and parking the proceeds in domestic instruments, profiting from higher interest rates and domestic currency appreciations (Shin and Zhao, 2013; Acharya and Vij, 2016; Bruno and Shin, 2017). The literature also argues that greater bond financing increased vulnerability of emerging market firms, as evidenced by higher leverage, solvency risks, and currency mismatches (Acharya et al., 2015; Chui et al., 2014, 2016; Beltrán et al., 2017; Chang et al., 2017; Alfaro et al., 2019). We complement this literature by showing that in East Asia the most significant part of the expansion after the GFC occurred in domestic corporate bond markets rather than in international ones. This evidence has implications for the aggregate financing patterns of emerging economies given that East Asia is the largest and fastest growing emerging region in terms of bond issuance activity. Our findings also suggest that the growth of domestic issuance activity was associated with an increase in the supply side of capital by domestic investors in domestic bond markets. This type of relation between issuances and investors also manifests in international bond markets, where the growth in international issuances was linked to foreign investors. Whereas carry trade opportunities could explain the rise of international issuances in foreign currency at cheap international interest rates (as 5 mentioned in the literature), our evidence on domestic bond issuances in domestic currency points to other factors also being important, such as increased cheap financing at home that led firms to accumulate cash for future needs. Adding to the literature documenting higher solvency risks and leverage following the GFC, our results suggest that these risks might have been concentrated among the new and smaller domestic bond issuers. However, these risks could be mitigated by the higher amount of cash savings (which could be used during negative shocks) and the domestic currency nature of the bonds raised. Our paper also relates to the literature that focuses on capital market development in East Asia. After the AFC, policy makers in the region implemented several policy initiatives to promote domestic bond financing and reduce firms’ overreliance in foreign currency debt. This literature examines the effectiveness of these policies and whether they could be useful for emerging economies in general. Using aggregate data, several papers argue that policy initiatives after the AFC seem to have increased the availability of domestic bond financing for firms in East Asia (Eichengreen et al., 2006; Spiegel, 2012; Ayala et al., 2015; Kang et al., 2015; Kowalewski and Pisany, 2019). Consistent with the aggregate patterns, studies using firm-level data also find evidence that policy initiatives implemented during 1995-2007 increased firms’ access to domestic bonds and the share of long-term debt in firms’ balance sheets, especially for less risky and more profitable firms (Mizen et al., 2012; Mizen and Tsoukas, 2014; Bose et al., 2019). We add to this literature in at least three different ways. First, our paper is the first to formally compare domestic versus international bond issuance activity, showing an overall change in market composition in East Asia since the early 1990s. This analysis complements the finding in the literature that shows an increase in domestic bond financing during 1990-2007. Second, whereas the existing literature focuses on changes in domestic debt financing in the early 2000s (when domestic policies were implemented), our paper highlights the developments after the GFC (when domestic and 6 international markets were already well established). We document a faster acceleration of domestic bond issuances during the post-GFC period. Third, our paper is the first study that sheds light on whether supply or demand factors were behind the rise in domestic bond financing in East Asia since 2008. Our evidence that a supply-side expansion of capital by investors has largely driven the rise in domestic bond issuances after the GFC could mean that East Asian firms have become more vulnerable to changes in market conditions. On the other hand, the increasing use of domestic bond markets implies lower firm vulnerability to currency depreciations and that large firms can turn to these markets when negative shocks occur in international markets. The remainder of the paper is organized as follows. Section 2 describes the data and methodology. Section 3 exploits transaction-level data to examine the growth of domestic and international bond financing and the types of firms behind the issuance patterns. Section 4 examines the cost of issuances and the role of different investors (the supply side of capital). Section 5 analyzes the behavior of firms (the demand side of capital) by studying the evolution of firms’ financial statements and the use of bond proceeds. Section 6 concludes. 2. Data 2.1. Sample of Economies The analysis in this paper focuses on the 10 largest economies in East Asia in terms of GDP: China, Hong Kong SAR, Indonesia, Malaysia, the Philippines, the Republic of Korea, Singapore, Taiwan, Thailand, and Vietnam. The data set contains 13,084 unique firms issuing in bond markets and 81,194 bond issuances over 1990-2016 (Table 1, Panel A). To benchmark against other regions of the world, we also analyze data from other emerging economies (in Eastern Europe and other Asia, Latin America, and the Middle East and Africa) and from advanced economies (in North America, Western 7 Europe, and Japan). Appendix Table 1 provides the list of economies included in each group. All values in the paper are reported in constant 2011 U.S. dollars. To avoid capturing the trends in the largest economy (China) or in the most financially developed economies in the sample, we show results for the median economy and run regressions at the economy-industry-year level with economy-industry fixed effects.1 Because bond issuance activity could have grown at different speeds across East Asian economies, we report our main regression results not only for all East Asian economies but also for three separate country groups: East Asia without China, advanced East Asia (Hong Kong SAR, Korea, Rep., Singapore, and Taiwan), and developing East Asia (Indonesia, Malaysia, the Philippines, Thailand, and Vietnam). We treat China differently because its capital markets are very large compared to those in other East Asian economies and underwent a different reform process over our sample period. In the mid-late 2010s, China opened its relatively closed capital markets to allow foreign investors to invest in domestic markets.2 By 2016, Chinese equity and bond markets were the largest among East Asian economies and the second largest in the world after those in the United States. 2.2. Transaction-level Data To study the bond issuance activity in East Asia, we use comprehensive, transaction-level data on corporate bonds issued in domestic and international markets over 1990-2016. The data come from 1 We divide industries across nine main categories using the first digit of the Standard Industrial Classification (SIC) codes: agriculture, forestry, and finishing; construction; finance, insurance, and real state; manufacturing; mining; retail trade; transportation and utilities; wholesale trade; and other services. Only economy-industry-year observations with reported issuance activity (of any type) are included in the regressions. 2 Qualified Foreign Institutional Investors (QFII) were introduced in 2002, allowing certain foreign institutions to purchase equity and bonds issued onshore by Chinese firms. The Renminbi Qualified Foreign Institutional Investors (RQFII) were introduced in 2011 as an alternative for foreign investors to purchase China’s onshore securities. The opening of Chinese capital markets continued during 2014. Launched in November 2014, Shanghai–Hong Kong Connect allows global investors to purchase stocks and bonds listed in Mainland China through the Hong Kong Stock Exchange. The platform also allows institutional investors from Mainland China to access securities listed in Hong Kong SAR. 8 Refinitiv’s Security Data Corporation (SDC) Platinum, which provides transactions of new issuances of common and preferred equity, as well as publicly and privately placed bonds.3 Because the analysis focuses on corporate financing, we exclude all public sector issuances, comprising issuances by national, local, and regional governments, government agencies, regional agencies, and multilateral organizations. We also exclude mortgage-backed securities and other asset-backed securities. We classify bond issuances as domestic or international using the residence-based approach followed by the Bank of International Settlements (BIS). We compare the location of the issuance with the residence of the issuing firm (Gruić and Wooldridge, 2012). Domestic securities are those issued by residents in their local markets. International issuances are those issued by residents abroad.4 Using this methodology, the data set includes 71,489 bond issuances in domestic markets and 9,703 bond issuances in international markets (Table 1, Panel A). Besides the residence-based approach, the literature uses two alternative criteria to classify international and domestic corporate bond issuances: the nationality-based and currency-based approaches (Gruić and Wooldridge, 2012; Avdjiev et al., 2014; Shin, 2014; McCauley et al., 2015). The nationality-based approach considers the nationality of a firm instead of its residence. Therefore, issuances by a subsidiary of a foreign-owned firm in the domestic market are considered as international, as the parent company resides outside the domestic market. Under the currency-based approach, debt issuances denominated in foreign currency are considered as international, and those in local currency as domestic. 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 as our main results. But for robustness we also use the nationality-based and 3 Refinitiv’s SDC Platinum is one of the most widely used databases on transaction-level research (Henderson et al., 2006; Kim and Weisbach, 2008; Bruno and Shin, 2017). Dealogic, an alternative database, yields similar estimates of issuance activity. 4 In the case of China, domestic issuances are those performed by firms residing in Mainland China and issuing in Mainland China’s bond markets (Shanghai, Shenzhen, and over-the-counter markets). Therefore, we consider issuances in Hong Kong SAR by firms residing in Mainland China as international issuances. 9 currency-based approaches to estimate the growth of domestic vis-à-vis international bond issuances. The results are robust to using these two alternative measures. For some parts of the analysis we use equity and syndicated loan data, which also come from SDC. The equity data include 43,196 issuances by 13,860 firms (Table 1, Panel B). We classify equity issuances into domestic and international using the residence-based approach. We use syndicated loans because, unlike typical bank loans, they are available for all economies. Moreover, syndicated loan markets capture a sizable share of bank financing and are the most relevant comparison to capital markets in terms of transaction size (amount raised per issuance) and terms of financing, such as debt maturity (Ivashina and Scharfstein, 2010; Cerutti et al., 2015). The syndicated loan data include 25,493 issuances by 9,606 firms (Table 1, Panel C). To distinguish between domestic and international (cross- border) syndicated loans, we compare the nationality of the lead bank that arranges the deal with the residence of the issuing firm. Domestic loans are those in which only domestic banks lead the syndication, whereas international syndicated loans entail the participation of at least one foreign bank acting as a lead arranger. 2.3. Firm Size Measure and Firm-level Data To study the types of firms issuing in domestic and international markets, we focus on size. We follow the literature that typically uses firm size or collateral to measure access to debt across markets, firms, and over time (Pagano et al., 2002; Beck and Dermirguc-Kunt, 2006; Claessens and Schmukler, 2007; Beck et al., 2008; Campello and Larrain, 2016; de la Torre et al., 2017). The literature on firms’ issuance activity tends to study the size of issuers through balance sheet data using, for example, firms’ assets.5 The downside of this approach is that balance sheet data 5 See, for example, Pagano et al. (2002), King and Segal (2009), Adrian et al. (2013), Becker and Ivashina (2014), Didier et al. (2015), and Bruno and Shin (2017). 10 are usually available for firms listed in stock exchanges across a wide set of economies, but not for unlisted firms that conduct issuances and constitute about 60 percent of all corporate bond issuers (Table 1).6 As 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 1990-2016. To make sure that the average amount raised is a reasonable 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 reasonable 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. Focusing on the bottom quantiles, the FSD of unlisted bond issuers lies to the left of the FSD of listed issuers, indicating that the smallest firms tapping bond markets are unlisted (Appendix Figure 1, Panel B). If we were to use assets from only listed firms, we would be disregarding the smallest bond issuers. To link capital raising issuances with firms’ balance sheet and income statement data, we merge the transaction‐level data from SDC with financial statement information for publicly listed firms from Worldscope. Using these data, we could also check that our results on firm size are not specific to the proxy we use. We explored two alternative measures of firm size from the Worldscope data: total assets and net sales, taking the end-of-year values reported by firms. Both sets of results with the alternative measures are qualitatively and quantitatively similar to the ones reported in the paper. 6 This statement also holds when considering as “listed firms” subsidiaries owned by listed parent companies. 11 2.4. Institutional Investors Data To analyze what types of investors are behind the purchases of East Asian corporate bonds, we use data on foreign and domestic investors for 2008-16. The data come from different sources and with different breakdowns. Regarding foreign investors, we have data on East Asian corporate bond holdings by all types of investors from the United States (U.S. investors) as well as mutual funds domiciled outside East Asia (including mutual funds in the United States). The former come from the U.S. Treasury International Capital (TIC) System, whereas the latter come from information collected by Calomiris et al. (2019). East Asian corporate bonds are those issued by a firm located in East Asia either in an East Asian market or an international market. Regarding domestic investors, we collect data on security holdings for pension and insurance as well as mutual funds. Data on investments by pension and insurance funds cover Hong Kong SAR, Korea, Malaysia, and Taiwan and come from the financial supervisory authorities, insurance associations, and pension fund websites. For these investors, we typically have data on their total security holdings, which include public bonds, corporate bonds, and equity from issuers located in East Asia and abroad. These data distinguish whether a pension/insurance fund holds securities issued in their own local capital market or abroad. For Hong Kong SAR, we have data on pension funds only. For pension funds in Korea, we have additional data on corporate bond holdings. For East Asian mutual funds, we have data on their East Asian corporate bond holdings (issued in East Asian and international markets). 3. Corporate Bond Financing: Domestic vs. International Markets We document the role of domestic and international bonds markets in East Asia in terms of issuance activity and types of firms using each market, focusing on three periods, 1990-98, 1999-2007, and 2008-16. This allows us to compare trends before and after two important milestones: (i) the AFC 12 (followed by efforts in East Asia to promote domestic markets), and (ii) the GFC (after which foreign investors prompted a boom in international issuances in emerging economies).7 3.1. Issuance Activity Since the early 1990s, firms in East Asia have significantly increased the amount of funds raised in capital markets. Whereas equity issuance activity grew as fast as GDP, bond financing grew faster than GDP and rapidly accelerated after 2008 (Figure 1, Panel A). The patterns in bond market financing in East Asia contrast with those in syndicated loan financing, for which the annual amount raised as a ratio of GDP fell over time.8 Importantly, the fastest expansion in corporate bond financing took place through domestic markets (Figure 1, Panel B). Of the total amount raised in domestic bonds during 1990-2016, 5 percent was raised in 1990-98, 11 percent in 1999-2007, and 84 percent in 2008- 16. These patterns hold when China is excluded from the sample. To formally assess to what extent the use of domestic and international markets were behind the rise in bond issuance activity in East Asia, we run panel regressions of the log (1+the annual amount raised) by each industry in each East Asian economy during 1990-2016 on dummy variables for the periods 1999-2007 and 2008-16. We use the period 1990-98 as the base, so we omit the dummy for these years. The regressions include economy-industry fixed effects to control for differences across economies and industries that are constant over time. We cluster standard errors at the economy-industry level, as we do for other regressions in the paper. We estimate separate models for domestic and international issuances. The estimated coefficients confirm that that domestic issuance activity was the main component of the growth in bond financing by East Asian firms at the economy-industry level (Table 7 Patterns in equity markets are reported in the working paper version of the paper (Abraham et al., 2019). 8 Although there is heterogeneity in the levels of issuance activity across economies in East Asia, the reported trends tend to hold across them (Appendix Figure 2, Panel A). 13 2, Panel A). Between 1990-98 and 2008-16, the annual amount of bonds raised domestically per economy-industry increased 381 percent. International issuances also grew between these periods, which is consistent with the messages in the literature, but this growth was much slower than the growth of domestic issuances (58 percent). These patterns hold when China is excluded from the sample, for advanced East Asian economies alone, and for developing East Asian economies alone. Furthermore, findings are robust to the two alternative definitions of international issuances described in the data section: by nationality of issuers and by currency (Table 2, Panels B and C). These latter results imply that the reliance on domestic currency bond financing by East Asian firms at the economy-industry level increased significantly over time.9 As the amount issued domestically grew faster than internationally, the share of total bond financing raised through domestic markets increased. After 2008, domestic markets surpassed international markets as the main source of bond financing for firms (Figure 2). In the median East Asian economy, the share of domestic bonds over the total raised per year increased from 36 percent to 80 percent between 1990-98 and 2008-16.10 In contrast, most of the bonds issued by firms from advanced and emerging economies outside East Asia were raised in international markets during 2008- 16. To formally estimate the shift in issuance market composition in East Asia, we run panel regressions of the share of the total amount raised in domestic markets per economy, industry, and year during 1990-2016 on dummy variables for the different periods and economy-industry fixed effects. The estimates imply that domestic bond issuances accounted for 21 percent of the total proceeds raised annually per industry across East Asian economies in 1990-98, but this share increased 9 Wald tests of equality of coefficients confirmed that the differences in trends between the amount raised in domestic and international markets in Table 2 are statistically significant at the 1 percent level. These tests were computed within each of the subsamples of economies and for the alternative definitions of international issuances. To make the table more concise, these tests are not reported in the paper. 10 The trend of a growing share of bonds raised in domestic markets tends to hold for every East Asian economy (Appendix Figure 2, Panel B). 14 to 69 percent in 2008-16 (Table 3). Again, this pattern holds across the different subsamples of East Asian economies.11 3.2. Firms behind the Expansion in Domestic Markets The growth in domestic bond financing in East Asia was accompanied by an increasing number of firms using bond markets, that is, by an expansion in the extensive margin (Figure 3, Panel A). In the median East Asian economy, the annual number of issuers in domestic bond markets increased more than six-fold (from 11 to 70) between 1990-98 and 2008-16. In contrast, the annual number of issuers in international markets declined (from 12 to 7) between the same periods. Moreover, the growth in the extensive margin was driven by smaller firms accessing capital markets. In the median East Asian economy, the size of the median bond issuer declined by 20 percent between 1990-98 and 2008-16 (Figure 3, Panel B). This overall pattern contrasts with that in other emerging and advanced economies, where the growth in the number of bond issuers was significantly slower and the median issuer size increased over the sample period. We run economy-industry level regressions to formally measure the extent to which the rise in domestic bond financing in East Asia was associated with an expansion in the number of issuers and a reduction in the issuer size. We estimate panel regressions of (i) the log (1+the number of issuers) and (ii) the log of size of the median issuer per economy, industry, and year during 1990-2016 on dummy variables for the different periods, in addition to economy-industry fixed effects. The estimates confirm that domestic markets underwent a statistically significant growth in the number of 11As a robustness, we repeated the analysis in Section 3.1 for non-financial sector issuers (based on residence and currency) and firms whose ultimate parent is a non-financial sector firm (nationality basis). The results for non-financial firms were very similar to the ones reported in the paper. Furthermore, the main results of this paper remained when excluding firms with some degree of government ownership, including stated-owned enterprises (SOEs). These firms accounted for 18 percent of the total issuance activity by East Asian firms during the sample period. The results also held for firms with some degree of government ownership, excluding the rest. For conciseness, we do not report all these robustness tests in the paper. 15 issuers (Table 4, Panel A). Specifically, the number of annual issuers was about 125 percent higher in 2008-16 when compared to 1990-98. In contrast, the number of annual issuers in international markets increased only 11 percent over the sample period.12 The estimates also show that the median firm issuing in domestic bond markets was smaller in 2008-16 relative to previous periods (Table 4, Panel B). The size of the typical issuer in domestic markets per economy-industry declined by around 30 percent in bond markets during 2008-16, whereas the size of international issuers remained constant over the same period.13 For a broader perspective, we compare the use of domestic and international bond, equity, and syndicated loan markets across firms of different size. We classify issuers into ten deciles by size and examine the share of firms, per decile, issuing in different markets during 1990-2016. The results show that, whereas the relatively smaller issuers use almost entirely domestic equity and bond markets, larger firms tend to use a wider set of instruments issued in different locations (Figure 4). In the first decile (the smallest issuers), 97 percent of the firms were domestic equity and/or domestic bond issuers, whereas only 7 percent of those firms issued in other markets. Relatively larger firms also used domestic capital markets, but they raised capital across markets in a more balanced manner.14 Because smaller firms are typically younger, this pattern of financing across firm size is consistent with a pecking order that suggests that firms use domestic markets first and, then, access international and syndicated loan markets at a later stage, when they become larger.15 12 Wald tests of equality of coefficients confirmed that the differences in trends between the numbers of domestic and international issuers in Table 4, Panel A are statistically significant at the 1 percent level. These unreported tests were computed within each of the subsamples of economies. 13 For robustness, we run regressions using total assets of listed firms (instead of our proxy based on issuance size) and find an even larger decline in the size of domestic bond issuers between 1990-98 and 2008-16 (Appendix Table 2). 14 The fact that the sum of different types of issuers is close to 100 percent in the first decile means that most of the smallest issuing firms raised funds in only one (domestic) market. The sum of these percentages does not need to be 100 percent because firms in each decile can issue in more than one market and thus belong to more than one group of issuers. 15 There is a high correlation between firm size (in terms of assets) and age. Using Worldscope data on listed East Asian firms, a 1 percent increase in age is associated with a 0.5 percent increase in size. 16 4. Cost of Issuances and Role of Investors In this section, we first study whether the supply side of financing (investors) was a force behind the observed acceleration in domestic bonds issuances by East Asian firms. We do so by analyzing the cost of issuances. We focus on the period after 2008 because, during those years, domestic bond issuances grew the most, domestic markets became the main source of bond financing for firms, and a significant number of new and smaller firms started to borrow bonds. Movements in the cost of issuances are informative because a decline in the cost of capital suggests that the liquidity provided by investors grew faster than firms’ demand for new financing.16 We also compare trends in the cost of issuance in domestic debt markets with those in other debt markets. In particular, we use international bond markets and (domestic and international) syndicated loan markets. This comparison can provide insights on whether the observed patterns were economy- wide or specific to some financial markets. To measure the change in issuance costs across debt markets after the GFC, we run regressions estimating the change in the yield to maturity for bonds and in the spread over LIBOR for syndicated loans between 2000-07 and 2008-16. The regressions include a dummy for the period 2008-16 and several controls: public or private issuance, ownership of issuer, type of coupon, currency, maturity fixed effects, and economy-industry fixed effects.17 The estimates show that East Asian firms issued corporate bonds in 2008-16 at yields about 39 percent lower than in 2000-07 (Table 5). Moreover, these regressions show that yields declined more for domestic than for international issuances. In particular, yields of domestic and international bonds declined by about 42 and 29 percent, respectively, between 2008-16 and 2000-07, at the same 16An increase in demand (albeit slower than the increase in supply) could still have occurred (di Giovanni et al., 2019). 17We do not collapse these regressions at the economy-industry level given the large number of controls. These regressions exclude China because of its large weight in the issuance data. But including China does not change the results. 17 time that domestic issuances increased more than international ones. The patterns in corporate bond markets contrast with those in syndicated loans. The issuance cost in syndicated loan markets actually increased for East Asian firms during 2008-16.18 The decline in the issuance cost of international bonds is consistent with the argument in the literature that an increase in the supply of bond financing drove the rise in international bond issuances after the GFC. Importantly, the larger decline in the issuance cost of domestic bonds implies that the supply side of funds (investors’ demand) for domestic bonds grew even faster than that for international bonds. Given that the supply of financing was an important factor behind the growth of domestic bond issuances, we examine whether domestic or foreign investors were behind the purchases of East Asian securities. This distinction is not trivial as these investors tend to differ in their portfolio choices, investment horizons, volatility, and type of financing offered, bringing distinctive benefits and risks (Ferreira and Matos, 2008; Karolyi, 2016; Martinez Peria and Schmukler, 2017). We study the investment behavior of foreign investors (all U.S. investors and foreign mutual funds) and domestic institutional investors (East Asian pension, insurance, and mutual funds) since the GFC. We find that foreign investors increased their U.S. dollar investments in corporate bonds issued by East Asian firms after 2008 and predominantly purchased East Asian corporate bonds issued in international markets. Holdings of East Asian corporate bonds by U.S. investors increased from $21 billion to $27 billion between 2008 and 2016. Holdings of foreign mutual funds increased from $13 billion to $75 billion during the same period. The share of bonds issued in international markets represented, on average, 96 and 99 percent of the East Asian corporate bonds held by U.S. investors and foreign mutual funds during 2008-16, respectively (Figure 5). 18 The fact that the syndicated loan prices increased while firms increased their issuances in bond markets could be consistent with a negative supply shock in the banking system that drove firms to switch toward bond markets (Becker and Ivashina, 2014). If this was the only factor behind the larger issuance of bonds, we would expect an increase in bond yields (as firms increased their demand for this security) and an overall constant level of debt (as firms simply reshuffled their financing sources). However, bond yields significantly declined after the GFC, while bond issuers substantially increased the overall amount of debt issued. 18 Domestic investors in East Asia also increased their investments in East Asian securities post 2008 and mostly bought securities issued in the same market where they were domiciled. East Asian pension and insurance funds multiplied their holdings of securities (equity, corporate bonds, and public bonds) by about 2.4 times between 2008 and 2016. On average, 74 percent of security investments by these investors were held in securities issued in their own domestic markets during 2008-16. We find similar patterns when focusing only on corporate bond holdings by pension funds in Korea, for which the share of domestic corporate bonds holdings was even larger, averaging 93 percent during the period (Figure 6, Panel A). East Asian mutual funds increased their holdings of East Asian corporate bonds from $12 billion to $60 billion between 2008 and 2016. During this period, the share of East Asian corporate bond holdings issued in East Asian markets was, on average, 93 percent (Figure 6, Panel B). In sum, this evidence for East Asia suggests that foreign investors were the main buyers of securities issued in international markets, whereas domestic investors were the main buyers of securities issued in domestic markets. This evidence is consistent with the view that institutional investors tend to buy securities issued in their own markets, and with the home bias in investors’ decisions documented in the literature (Burger et al., 2018b; Maggiori et al., 2020). 5. Firm Performance and Use of Funds Next, we focus on the behavior of the demand side of financing (firms) by examining the reaction of different firms that issued in East Asian domestic bond markets. We analyze the evolution of their financial statements and the use of bond proceeds. Firm performance can provide additional insights on whether the expansion of domestic bond markets in East Asia was supply or demand driven. Smaller firms typically have access to a limited number of (mainly domestic) debt markets and are more financially constrained than larger firms. 19 Thus, if the supply-side of financing drove the rise in domestic bond issuances, we expect that the relatively smaller new issuers would have increased their leverage more than the larger firms already issuing bonds, which typically have adequate access to funds through multiple domestic and international debt markets (Faulkender and Petersen, 2006; Leary, 2009). Moreover, if the supply of financing accelerated faster than the demand, we would expect that firms hoarded large shares of the bond proceeds in cash and that the share of cash savings per bond issuance was higher during 2008- 16 than in previous periods (Erel et al., 2012; Bruno and Shin, 2017; Acharya et al., 2020). Under the alternative hypothesis that increasing firms’ demand for capital was more important, we would expect that firms invested or spent most of the bond proceeds raised. By studying financial ratios and other key metrics, we can also shed light on the extent to which bond issuers increased their vulnerability. The literature mentioned in the introduction argues that the expansion of bond financing after the GFC increased corporate risks in emerging economies. To examine firms’ financial statements and the use of bond proceeds during 2008-16, we work with the merged transaction‐level debt issuances and annual balance sheets and income statements for publicly listed firms. In our analysis, new bond issuers are the firms that issued bonds for the first time after 2008. Recurrent bond issuers include firms that issued bonds after 2008 but had already issued bonds before 2008. This type of bond issuers might have behaved differently than the new bond issuers, as they already had access to bond financing and likely were larger firms.19 Non-issuers are firms that did not issue bonds or equity after 2008. By focusing on publicly listed firms, the sample of bond issuers is reduced to a fraction of firms, as only 38 percent of bond issuers in our data are publicly listed firms. These firms tend to be larger than non-listed firms and, thus, might have fewer unrealized investments opportunities than non-listed bond issuers. 19As of 2016, the number of new East Asian firms tapping bond markets surpassed that of recurrent issuers. Consistent with the patterns shown in Section 3, new bond issuers were about half as large (in terms of assets) as recurrent issuers and they mostly used domestic markets to obtain bond financing (Appendix Figure 3). 20 We examine the following key financial statement variables and performance ratios: total assets, total debt, leverage (debt over assets), cash, capital expenditures (CAPEX), earnings before interest and depreciation (EBITDA), interest expenses, ICR, and ROE. ICR and ROE are measures of firm performance. ICR shows how easily a firm can pay debt interest expenses through internal sources of finance by calculating the ratio of EBITDA to interest expenses. ROE measures the ratio of net earnings to shareholders’ equity. A decline in ICR and/or ROE signal a deterioration in the financial performance and increased solvency risks. The three groups of firms followed similar trends before 2008, but their behavior differed after 2008 (Figure 7). Although debt outstanding substantially increased after 2008 for both new and recurrent bond issuers (consistent with the rise in bond issuances), the increase in debt was substantially larger for new bond issuers. For the median new issuer total debt in 2016 was 4.8 times the average value of debt in 2000-07, whereas total debt was 2.7 times higher in 2016 than in 2000-07 for the median recurrent issuer. Moreover, new bond issuers accumulated assets at a slower rate than debt, increasing their (debt over assets) leverage ratio. The median leverage ratio for these firms was 22 percent higher in 2016 than in 2000-07. This pattern contrasts with that of recurrent issuers for which debt and assets expanded at a similar pace, keeping their leverage ratio stable over time.20 Although new issuers seem to have used part of the new debt to conduct some investments, they also accumulated a substantial amount of cash after 2008. In 2016 the median new issuer had cash holdings that were 2.9 times the average holdings in 2000-07. In turn, CAPEX was 1.5 times larger in 2016 relative to 2000-07 for the median new issuer. Relative to recurrent issuers, new issuers accumulated more cash whereas the growth in CAPEX was similar for both types of firms. According to ICR and ROE, declining financial performance was characteristic of new issuers. These firms exhibited worse financial performance than recurrent issuers. ICR declined after 2008 for 20 These patterns also hold if leverage is calculated as debt over equity. 21 new bond issuers, whereas it tended to increase for recurrent issuers. ROE declined for both groups of firms after 2008, but the fall was largest among the new issuers. Even though new issuers faced cheaper financing in bond markets, these patterns could imply that the large cash holdings yielded relatively lower returns. It might also be the case that the financing directed to new investments was geared toward projects with relatively low rates of return. To formally assess changes in the financial statement characteristics of East Asian firms after 2008, we run a difference-in-difference regression approach. For each of the financial statement variables we estimate the following regression specification: ln(Yit ) = β1 post + β2 (post x Direcurrent ) + β3 (post x Dinew ) + αi + εit . (1) The dependent variable Yit is each of the financial statement variables described above for each firm i and period t. All variables are averaged within two periods: 2008-16 and 2000-07.21 The independent variable post is a dummy that equals one for the 2008-16 period and zero for the 2000-07 period, Direcurrent is a dummy variable that equals one if a firm is a recurrent bond issuer and zero otherwise, and Dinew is a dummy variable that equals one if a firm is a new bond issuer and zero otherwise. β1 measures the change in each variable for non-issuers during 2008-16 relative to 2000-07, whereas β2 and β3 measure the differential effect for recurrent issuers and new bond issuers relative to non-issuers, respectively. αi denotes firm fixed effects. The regression results confirm that debt accumulation after 2008 was significantly larger for new bond issuers than for recurrent bond issuers and non-issuers (Table 6). Consistent with the earlier patterns, leverage of new bond issuers grew faster than for recurrent issuers during 2008-16, while their cash holdings increased substantially and relatively more than CAPEX. Results also show that 21 By collapsing time series data into periods, our standard errors are robust to concerns of autocorrelation (Bertrand et al., 2004; Khwaja and Mian, 2008). 22 the financial indicators of new issuers deteriorated relative more than those of other firms. The ICR of new issuers deteriorated relative to the ICR of non-issuers, whereas the ROE of new issuers deteriorated not only relative to the ROE of non-issuers but also relative to the ROE of recurrent issuers. The regression results are very similar when excluding China (Appendix Table 3). We now proceed to study more systematically how East Asian issuers used the funds raised after 2008, following the methodology pioneered by Kim and Weisbach (2008).22 We focus on the changes in five key accounting variables that potentially capture the use of the proceeds raised through bond issuances. For each bond issuer, we estimate changes in CAPEX, acquisitions, R&D, inventory, and cash holdings. This methodology allows us to directly link the proceeds from bond issuances to the subsequent firms’ investment measures. We employ the following specification for each of the five measures of possible use of bond issuances during 2008-16: issuance Y = β1 ln [( assets ) + 1] + β2 (other sources)+ β3 ln [assets0 ] + αc + αt + ε, (2) 0 where Y = ln[((Vt – V0 )⁄assets0 ) + 1] corresponds to balance sheet variables (V = inventory and cash), and Y = ln[(∑ti=1 Vi ⁄assets0 ) + 1] to income and cash flow variables (V = CAPEX, acquisitions, and R&D). Other sources = ln[(∑t i=1 ( (total sourcesi – issuance)⁄assets0 ) + 1], where total sources represent the total funds generated by the firm internally and externally. Year 0 is the year just prior to the bond issuance and year t = 1, 2, 3 denotes de number of years after year 0. In the specification, αc and αt denote economy and time fixed effects, respectively. To simplify notation, we omit all the other subscripts from Equation (2). We present separate estimates for the new bond issuers and recurrent bond issuers. The estimations are panel regressions conducted at the firm level during 2008-16. The coefficient β1 measures the proportion of proceeds raised per issuance used to increase each of the 22Erel et al. (2012) and Calomiris et at. (2019) use the same methodology to estimate the use of funds of international bond issuances by emerging market firms during the post-GFC period. 23 possible uses of funds (CAPEX, acquisitions, R&D, inventory, and cash). We report the estimated elasticities and the dollar effects for the median firm in the median economy.23 The results show that the most important use of funds (the largest β1 coefficient) per bond issuance after 2008 was cash holdings (Table 7).24 Estimation of the dollar effects indicate that new and recurrent bond issuers held in cash around 40 cents for every dollar raised in the issuance year. Two years later, new bond issuers still held in cash 30 cents per dollar raised, whereas the additional amount held in cash by recurrent bond issuers was not statistically different from zero in the first year after the issuance. Aside from cash, the main uses of bond proceeds in the first year after issuance were CAPEX (11 cents for new issuers and 17 cents for recurrent issuers per dollar raised) and inventory (8 cents for new issuers and 11 cents for recurrent issuers per dollar raised). Given the large cash coefficient per bond raised during 2008-16, we study next whether the high coefficient of cash accumulation was specific to this period (which exhibited a fast acceleration in bond issuances) or whether it was also observed in previous years. To do so, we exploit the time series dimension of the data by running the same regression in Equation 2 for each year before and after 2008. The cash accumulation coefficients (β1) estimated from the regressions show that firms in East Asia saved a significantly larger proportion of bond proceeds in cash during 2008-16 than during previous years, when cash accumulation from bond proceeds was typically close to zero (Figure 8). In 2001-07, the only year that records higher levels of cash accumulation per bond issuance was 2007, just before the GFC. 23 To calculate the dollar effects, we first predict the use of proceeds using the corresponding bond issuance observations and the estimated coefficient from the regression result of Equation (2). As fixed effects, we use the coefficients for each economy and year of the corresponding economy-year pair. We then calculate the predicted values of the dependent variables again after adding one U.S. dollar to the issuance value. Next, we calculate the difference of the two predicted values to obtain the change in the use of proceeds due to one U.S. dollar increase in issuance. Lastly, we compute the average difference per firm. For each economy, we then take the average difference for the median firm and report the value for the median economy. 24 We omit the β coefficients on other sources of capital from Table 7 to save space as we use this variable as a control. 2 24 6. Conclusions This paper shows that, although international bond markets were an important contributor to the corporate financing boom in East Asia during the 1990s, domestic markets have played an even more important role in the new millennium, especially since 2008. As the amount raised domestically grew faster than that raised internationally, the share of domestic currency debt increased, the number of firms issuing in domestic markets expanded, the size of issuing firms declined, and domestic markets became the predominant place where bonds were issued. The paper also sheds light on the forces behind the acceleration in domestic bond financing in East Asia. Our findings suggest that a supply-side expansion by domestic investors that lowered the cost of capital in domestic bond markets was a key factor behind the rise in domestic bond financing. Backing this hypothesis, we find that (i) since 2008 new (relatively smaller) firms started to issue domestic bonds for the first time; (ii) the rise in domestic issuance occurred while bond yields substantially declined (financing costs dropped); (iii) the new issuers increased leverage relatively faster than recurrent issuers, while keeping a substantial share of the bond proceeds raised in cash; and (iv) the proportion of cash savings per bond issuance was larger during 2008-16 than in the previous period. We also find that domestic investors were the main providers of liquidity for domestic bond markets after 2008. Our evidence implies that to comprehensively understand the trends in capital market financing by emerging market firms, domestic markets cannot be overlooked. Our results are consistent with the notion that domestic and international markets are segmented and might complement each other by servicing different types of firms, even with no or few restrictions to cross- border investments. Compared to international markets, domestic bond markets exhibit substantial differences in terms of issuance activity, currency denomination, and size of issuing firms. This finding might be related to the fact that foreign and domestic investors tend to buy securities issued in their 25 own markets, offering different types of financing to different firms. Thus, focusing only on the amount of debt issued abroad might miss a significant portion of the total value of corporate debt and inaccurately assess its composition in terms of investors, terms of financing, and borrowers. Bringing domestic issuances into the analysis can help measure corporate vulnerabilities and exposures to different shocks more adequately. Even though the issuance activity in East Asia is large enough to have implications for the aggregate financing patterns of emerging economies, the region seems to be an exception in the emerging world. Outside East Asia, the relative importance and growth of domestic bond issuances was much lower. Different factors could explain the uniqueness of East Asia. The growth of East Asian domestic bond markets could be traced back to the AFC, after which policy makers implemented a series of reforms to reduce dependence on foreign financing (Mizen and Tsoukas, 2014; Bose et al., 2019). Stronger fiscal discipline by East Asian governments could have been another reason behind the expansion in financing for the corporate sector since the GFC. Specifically, relatively stronger fiscal positions by governments could have reduced crowding out and, as a result, increased financing toward the corporate sector. 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Xiao, J. 2018. “Corporate Debt Structure Precautionary Savings, and Investment Dynamics.” Meeting Papers 887, Society for Economic Dynamics. 30 Figure 1. Growth of Bond Financing This figure shows the evolution of capital market financing during 1990-2016. Panel A shows, for the median economy in each region and period, the average amount of equity, corporate bonds, and syndicated loans raised per year as a percentage of GDP. Panel B shows the aggregate amount of corporate bond financing raised in billions of constant 2011 U.S. dollars (USD) per year across East Asian economies during 1990-2016. This panel shows total values for East Asia (Panel B1) and for East Asia excluding China (Panel B2). A. Total Amount Raised 10% 8% Share of GDP 6% 4% 2% 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 East Asia Eastern Europe and Latin America Middle East and Africa Advanced economies other Asia Equity Corporate bonds Syndicated loans B. Amount Raised per Year in Bond Markets by East Asian Firms B1. East Asia B2. East Asia excl. China 1,800 350 1,600 300 1,400 250 1,200 Billion USD Billion USD 1,000 200 800 150 600 100 400 200 50 0 0 1998 1990 1992 1994 1996 2000 2002 2004 2006 2008 2010 2012 2014 2016 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 All markets Domestic markets International markets Figure 2. Share of Domestic and International Bond Issuances This figure shows, for the median economy in each region and period, the average share of corporate bond financing 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. 100% 90% 20% 80% 35% Share of the total raised 70% 54% 64% 68% 60% 83% 96% 90% 50% 100% 40% 80% 30% 65% 20% 46% 36% 32% 10% 17% 4% 10% 0% 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 East Asia Emerging economies Advanced economies 2008-2016 Domestic markets International markets Figure 3. Number and Size of Firms Issuing Bonds This figure shows trends in the number and size of firms issuing in domestic and international bond markets. Panel A shows, for the median economy in each region and period, the average number of firms issuing bonds per year in domestic and international markets. Panel B shows, for the median economy in each region and period, the size of the median firm issuing bonds in domestic and international markets. 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). A. Number of Firms Issuing in Domestic and International Markets 80 7 70 60 Number of firms 50 40 7 70 30 15 27 25 20 12 33 10 21 16 11 1 1 2 10 0 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 East Asia Emerging economies Advanced economies B. Size of Firms Issuing in Domestic and International Markets 300 250 200 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 Domestic markets International markets Figure 4. 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 during 1990-2016. 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 Figure 5. Foreign Investors: East Asian Corporate Bond Holdings This figure shows foreign investors' holdings of East Asian corporate bonds during 2008-16. Panel A shows trends for all investors domiciled in the United States. Panel B shows trends for mutual funds domiciled outside East Asia. The figure shows values in billions of constant 2011 U.S. dollars (USD) and distinguishes between holdings of bonds issued in East Asia and in international capital markets. A. Holdings by U.S. Investors 40 20% 35 30 15% Billion USD 25 20 10% 15 10 5% 5 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 B. Holdings by Foreign Mutual Funds 100 20% 90 80 15% 70 60 Billion USD 50 10% 40 30 5% 20 10 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 East Asian markets (left axis) International markets (left axis) Share in East Asian markets (right axis) Figure 6. Domestic Investors This figure shows East Asian investors' holdings during 2008-16. Panel A shows security holdings of pension and insurance funds in selected economies distinguishing between investments in their own domestic market and investments in overseas markets. Panel A1 shows total security holdings (including equity and bonds) by investors in Hong Kong SAR, Korea, Malaysia, and Taiwan. For Hong Kong SAR, only pension funds are included. Panel A2 shows total corporate bond holdings (including East Asian and foreign firms) by pension funds in Korea. Panel B shows East Asian corporate bonds holdings of mutual funds domiciled in East Asia. The panel distinguishes between bonds issued in East Asian and in international capital markets. Values are reported in billions of constant 2011 U.S. dollars (USD). A. Holdings by East Asian Pension and Insurance Funds A1. Selected Economies: Security Holdings 1,200 100% 1,000 80% Billion USD 800 60% 600 40% 400 200 20% 0 0% 2012 2016 2008 2009 2010 2011 2013 2014 2015 A2. Korean Pension Funds: Corporate Bond Holdings 45 100% 40 35 80% Billion USD 30 60% 25 20 40% 15 10 20% 5 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 Domestic investments (left axis) Overseas investments (left axis) Share of domestic investments (right axis) B. Holdings by East Asian Mutual Funds: East Asian Corporate Bond Holdings 60 100% 50 80% 40 Billion USD 60% 30 40% 20 10 20% 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 East Asian markets (left axis) International markets (left axis) Share in East Asian markets (right axis) Figure 7. Trends in Balance Sheet and Income Statement Variables This figure shows the trends in financial statement variables for listed East Asian bond issuers and non-issuers during 2000-16. The figure distinguishes between recurrent bond issuers, new bond issuers, and non-issuers. Recurrent bond issuers are firms that issued bonds after 2008 and had already issued bonds before 2008. New bond issuers are firms that issued bonds for the first time after 2008. Non-issuers are firms that did not issue bonds or equity after 2008. All variables are normalized by their average value during 2000-07. For each variable the figure shows the results for the median firm in the median economy per year. Debt Assets Leverage (Debt / Assets) 5.0 5.0 1.3 4.5 4.5 1.2 4.0 4.0 3.5 3.5 1.1 3.0 3.0 1.0 2.5 2.5 2.0 2.0 0.9 1.5 1.5 0.8 1.0 1.0 0.7 0.5 0.5 0.0 0.0 0.6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2002 2004 2005 2006 2007 2009 2010 2011 2012 2014 2015 2016 2003 2008 2013 Cash CAPEX Earnings (EBITDA) 3.5 3.5 3.5 3.0 3.0 3.0 2.5 2.5 2.5 2.0 2.0 2.0 1.5 1.5 1.5 1.0 1.0 1.0 0.5 0.5 0.5 0.0 0.0 0.0 2001 2002 2003 2004 2006 2007 2008 2009 2011 2012 2013 2014 2016 2000 2005 2010 2015 2000 2001 2003 2005 2006 2007 2008 2009 2010 2012 2014 2015 2016 2002 2004 2011 2013 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Interest Expenses Interest Coverage Ratio (ICR) Return on Equity (ROE) 3.5 1.6 1.2 3.0 1.4 1.0 1.2 2.5 0.8 1.0 2.0 0.8 0.6 1.5 0.6 0.4 1.0 0.4 0.5 0.2 0.2 0.0 0.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2000 2001 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2016 2002 2011 2000 2001 2002 2003 2004 2005 2006 2007 2009 2010 2011 2012 2014 2015 2016 2008 2013 Recurrent bond issuers New bond issuers Non-issuers Figure 8. Bond Issuances and Cash Accumulation per Year This table shows the coefficients of OLS regressions that estimate the change in cash after firms' bond issuances. The regression specification is the same as in Table 7, which follows Kim and Weisbach (2008). The figure shows the estimated coefficients and their confidence intervals (95%) per year. The lines represent the average estimated coefficient for the periods 2001-07 and 2009-16. 1.2 0.8 0.4 Cash coefficient 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -0.4 -0.8 -1.2 -1.6 Table 1. Summary Statistics This table shows the total number of firms, number of issuances, and amount raised in East Asia per market during 1990-2016, indicating the shares that correspond to listed firms. Listed firms 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. 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% B. 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% 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% Table 2. Issuance Activity in Domestic and International Bond Markets This table shows OLS (ordinary least squares) regressions of the log of (1+amount raised) in bond markets per East Asian economy, industry, and year during 1990-2016 on two period dummies (1999-2007 and 2008-16). The regressions estimate domestic and international issuances separately. Panel A classifies domestic and international bond issuances by the residence of the issuing firm. Panel B classifies domestic and international bond issuances by the nationality of the issuing firm (parent company). Panel C classifies domestic and international bond issuances by 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. Advanced East Asia includes Hong Kong SAR, Korea, Singapore, and Taiwan. Developing East Asia includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. A. Residence of Issuer Dependent variable: log (1+amount raised) per economy, industry, and year Bond market: Domestic International Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 2.03 *** 1.85 *** 2.21 *** 1.53 *** -0.08 -0.15 0.26 -0.51 ** [0.22] [0.22] [0.37] [0.22] [0.18] [0.19] [0.30] [0.23] Period 2008-16 3.81 *** 3.13 *** 3.60 *** 2.71 *** 0.58 ** 0.17 0.81 ** -0.39 [0.31] [0.24] [0.35] [0.31] [0.25] [0.23] [0.31] [0.31] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 2,079 1,847 867 980 2,079 1,847 867 980 No. of clusters 90 81 36 45 90 81 36 45 R-squared 0.61 0.63 0.63 0.61 0.54 0.57 0.61 0.46 B. Nationality of Issuer Dependent variable: log (1+amount raised) per economy, industry, and year Bond market: Domestic International Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 1.68 *** 1.65 *** 1.80 *** 1.24 *** -0.79 *** -0.76 *** 0.25 -1.55 *** [0.24] [0.25] [0.38] [0.33] [0.26] [0.27] [0.36] [0.34] Period 2008-16 3.13 *** 2.76 *** 2.61 *** 2.22 *** -0.24 -0.50 0.68 -1.25 *** [0.29] [0.26] [0.41] [0.40] [0.29] [0.30] [0.43] [0.44] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 1,429 1,276 822 657 1,429 1,276 822 657 No. of clusters 85 76 54 51 85 76 54 51 R-squared 0.59 0.59 0.55 0.57 0.52 0.53 0.54 0.47 C. Currency Denomination Dependent variable: log (1+amount raised) per economy, industry, and year Bond market: Domestic issuances International issuances Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 2.05 *** 1.89 *** 2.34 *** 1.49 *** -0.10 -0.17 0.24 -0.52 ** [0.21] [0.21] [0.36] [0.22] [0.19] [0.20] [0.33] [0.23] Period 2008-16 3.73 *** 3.05 *** 3.46 *** 2.69 *** 0.78 *** 0.46 * 1.43 *** -0.38 [0.30] [0.23] [0.33] [0.30] [0.25] [0.25] [0.33] [0.30] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 2,079 1,847 867 980 2,079 1,847 867 980 No. of clusters 90 81 36 45 90 81 36 45 R-squared 0.60 0.63 0.64 0.60 0.54 0.57 0.61 0.46 Table 3. Share Raised in Domestic Markets This table shows OLS regressions estimating the share of domestic to total amount raised in bond markets per East Asian economy, industry, and year during 1990-2016 on two period dummies (1999- 2007 and 2008-16). The “mean, 1990-98” estimate corresponds to the average of the annual share of bonds raised domestically across economy-industry observations during 1990-98. 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. Advanced East Asia includes Hong Kong SAR, Korea, Singapore, and Taiwan. Developing East Asia includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. Dependent variable: share of the total raised in domestic markets per economy, industry, and year Sample of East Asia: All Excl. China Advanced Developing Mean, 1990-98: 0.21 0.24 0.30 0.19 Period 1999-07 0.28 *** 0.26 *** 0.24 *** 0.28 *** [0.03] [0.03] [0.05] [0.03] Period 2008-16 0.48 *** 0.43 *** 0.42 *** 0.45 *** [0.03] [0.03] [0.05] [0.04] Economy-industry FE Yes Yes Yes Yes No. of observations 2,079 1,847 867 980 No. of clusters 90 81 36 45 R-squared 0.41 0.40 0.38 0.40 Table 4. Extensive Margin and Issuer Size This table shows panel regressions characterizing the trends in the number and size of firms issuing bonds in East Asia. Panel A shows OLS regressions of the log of (1+the number of issuers) in bond markets per East Asian economy, industry, and year during 1990- 2016 on two period dummies (1999-2007 and 2008-16). Panel B shows OLS regressions of the size of East Asian 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 estimate 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. Advanced East Asia includes Hong Kong SAR, Korea, Singapore, and Taiwan. Developing East Asia includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. A. Extensive Margin: Number of Firms Issuing Bonds Dependent variable: log (1+number of issuers) per economy, industry, and year Bond market: Domestic International Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 0.53 *** 0.49 *** 0.56 *** 0.44 *** -0.06 -0.07 0.06 -0.18 *** [0.07] [0.07] [0.14] [0.06] [0.05] [0.05] [0.07] [0.06] Period 2008-16 1.25 *** 0.97 *** 1.16 *** 0.81 *** 0.11 * -0.01 0.15 * -0.15 ** [0.13] [0.09] [0.15] [0.10] [0.06] [0.05] [0.08] [0.06] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 2,079 1,847 867 980 2,079 1,847 867 980 No. of clusters 90 81 36 45 90 81 36 45 R-squared 0.64 0.70 0.67 0.70 0.65 0.69 0.74 0.53 B. Size of Corporate Bond Issuers Dependent variable: size (in logs) of the median issuing firm per economy, industry, and period Bond market: Domestic International Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 0.03 0.05 0.28 * -0.19 0.23 * 0.16 0.27 0.05 [0.11] [0.13] [0.16] [0.19] [0.12] [0.10] [0.17] [0.11] Period 2008-16 -0.30 *** -0.31 ** -0.18 -0.44 ** 0.14 0.09 0.39 ** -0.22 [0.11] [0.13] [0.15] [0.21] [0.15] [0.14] [0.18] [0.18] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 234 207 98 109 217 192 98 94 No. of clusters 87 78 35 43 80 71 35 36 R-squared 0.79 0.74 0.80 0.60 0.69 0.75 0.77 0.73 Table 5. Cost of Issuances in Different Debt Markets This table shows OLS regressions that calcualte the relative changes in yield to maturity (for corporate bonds) and spread over LIBOR (for syndicated loans) during 2008-16, relative to 2000-07. Debt-firm controls include a dummy indicating whether the bond was issued publicly or privately, a dummy indicating whether the firm is foreign owned, a dummy indicating whether the firm has partial government ownership, a fixed or flexible coupon dummy, and a dummy indicating whether the debt transaction is denominated in foreign or domestic currency. Standard errors are clustered at the economy-year level. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. China is excluded from the regressions. Type of instrument: Corporate bonds Syndicated loans Dependent variable: log (yield to maturity) log (spread over LIBOR) Base period: 2000-07 Total Domestic International Total Domestic International Period 2008-16 -0.39 *** -0.42 *** -0.29 *** 0.79 *** 0.69 *** 0.80 *** [0.07] [0.07] [0.05] [0.08] [0.20] [0.08] Debt-firm controls Yes Yes Yes Yes Yes Yes Maturity FE Yes Yes Yes Yes Yes Yes Economy-industry FE Yes Yes Yes Yes Yes Yes No. of observations 26,759 23,151 3,594 3,067 479 2,579 No. of clusters 62 59 36 71 27 70 R-squared 0.58 0.62 0.42 0.47 0.49 0.52 Table 6. Changes in Financial Statements This table shows OLS regressions of changes in balance sheet and income statement variables for listed East Asian bond issuers and non-issuers between 2000-07 and 2008-16. The dependent variables are at the firm level and are averaged within periods, converted to log (1+value), and then winsorized at the 95%. The regressions estimate different effects for recurrent bond issuers, new bond issuers, and non-issuers. Recurrent bond issuers are firms that issued bonds after 2008 and had already issued bonds before 2008. New bond issuers are firms that issued bonds for the first time after 2008. Non-issuers are firms that did not issue bonds or equity after 2008. EBITDA means earnings before interest, tax, depreciation, and amortization; ICR means interest coverage ratio; ROE means return on equity. The regressions include firm fixed effects (FE). The bottom row reports the difference between the coefficients for new and recurrent issuers in the post period (2008-16) and the associated Wald test of whether this difference is statistically different from zero. 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. Interest Dependent variable: Debt Assets Leverage Cash CAPEX EBITDA ICR ROE expenses Post (non-issuers) 0.07 0.33 *** -0.03 *** 0.55 *** 0.01 0.25 *** -0.07 0.18 -0.18 *** [0.12] [0.03] [0.01] [0.02] [0.05] [0.05] [0.11] [0.17] [0.04] Post x recurrent bond issuers 0.61 *** 0.30 *** 0.07 *** 0.26 *** 0.35 *** 0.14 0.44 *** -0.13 0.06 [0.16] [0.08] [0.02] [0.09] [0.09] [0.10] [0.13] [0.17] [0.05] Post x new bond issuers 1.81 *** 0.73 *** 0.14 *** 0.37 *** 0.69 *** 0.63 *** 1.21 *** -0.33 ** -0.07 ** [0.17] [0.11] [0.02] [0.10] [0.11] [0.13] [0.25] [0.13] [0.04] Firm FE Yes Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 12,582 11,916 12,262 8,016 11,618 9,246 946 778 7,132 No. of clusters 91 90 90 89 90 88 37 35 87 R-squared 0.81 0.93 0.79 0.90 0.87 0.89 0.93 0.81 0.66 Test: (post x new) - (post x recurrent) 1.20 *** 0.42 *** 0.07 *** 0.11 * 0.34 *** 0.49 *** 0.77 *** -0.20 -0.13 *** Table 7. Bond Issuances and Use of Funds This table shows OLS regressions that calculate how firms used proceeds from bond issuances, as reflected on assets and expenditures of listed East Asian bond issuers during 2008-16. The analysis follows Kim and Weisbach (2008). The dependent variable for balance-sheet variables (inventory and cash) is Y = log[((Vt - V0)/assets0) + 1]. The dependent variable for cash-flow statement and income statement variables (capital expenditures, acquisitions, and research and development expenditures) is Y = log[(∑iVi/assets0) + 1]. Independent variables are the log of bond issuance value over total assets, the log of other sources of funds over total assets, and the log of total assets. Total assets are measured at the value of the year just before the issuance. We estimate separate regressions for recurrent and new bond issuers. Recurrent bond issuers are firms that issued bonds after 2008 and had already issued bonds before 2008. New bond issuers are firms that issued bonds for the first time after 2008. The dollar effect estimates the change in the dependent variable resulting from one dollar increase in a firm’s bond issuance. All variables are winsorized at the 95%. All regressions include economy and year fixed effects. Column (7) reports the difference between the coefficients for recurrent and new issuers and the Wald test of whether this difference is statistically different from zero. Standard errors are clustered at the industry (two-digit SIC) level. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively. Independent variable: bond issuance value Years relative to issuance New bond issuers Recurrent bond issuers Difference in (Issuance Dollar Dollar coefficients N β1 N β1 at t=1) effect effect Dependent variable: (1) (2) (3) (4) (5) (6) (7)=(2) - (5) ∑CAPEX 1 2,906 0.11 *** 0.11 1,490 0.18 *** 0.17 -0.07 2 2,303 0.16 *** 0.17 1,273 0.19 ** 0.18 -0.03 3 1,585 0.20 *** 0.20 1,042 0.12 * 0.09 0.08 ∑Acquisitions 1 2,574 0.03 *** 0.03 1,478 0.06 0.06 -0.03 2 1,864 0.04 * 0.05 1,206 0.08 0.08 -0.04 3 1,204 0.12 *** 0.12 936 0.19 0.20 -0.08 ∑R&D 1 1,438 0.05 *** 0.05 642 0.02 0.02 0.03 *** 2 1,069 0.08 *** 0.08 501 0.06 *** 0.06 0.03 *** 3 703 0.14 *** 0.13 383 0.14 *** 0.16 0.00 Δ Inventory 1 2,750 0.08 *** 0.08 1,359 0.11 ** 0.11 -0.03 2 2,244 0.12 *** 0.12 1,209 0.08 ** 0.08 0.04 3 1,577 0.21 *** 0.19 1,009 -0.03 -0.01 0.23 *** Δ Cash 1 2,782 0.43 *** 0.41 1,363 0.44 ** 0.39 0.00 2 2,254 0.32 *** 0.30 1,218 0.16 0.18 0.16 * 3 1,591 0.32 *** 0.31 1,017 0.16 0.17 0.16 ** Appendix Figure 1. Firm Size Proxy This figure shows data to support our use of average amount raised as a proxy for firm size. Panel A shows, for 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 y = 0.99x + 1.98 8 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 Appendix Figure 2. Growth of Bond Financing East Asian Economies This figure shows the evolution of capital market financing during 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 share of corporate bond financing 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. Total Amount Raised 31% 20% 18% 16% 14% Share of GDP 12% 10% 8% 6% 4% 2% 0% 1990-1998 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 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 China Hong Kong Indonesia Korea Malaysia Philippines Singapore Taiwan SAR Equity Corporate bonds 20% 0% Syndicated loans B. Share of Domestic and International Bond Issuances 100% 90% 80% Share of the total raised 70% 60% 50% 40% 30% 20% 10% 0% 1990-1998 2008-2016 1999-2007 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 1990-1998 1999-2007 2008-2016 1990-1998 1999-2007 2008-2016 1990-1998 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 Kong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam SAR Domestic markets International markets Appendix Figure 3. Number and Amount Raised by New and Recurrent Bond Issuers This figure shows bond issuance activity by East Asian firms during 2000-16 distinguishing between recurrent and new issuers. Recurrent bond issuers are firms that issued bonds after 2008 and had already issued bonds before 2008. New bond issuers are firms that issued bonds for the first time after 2008. Panel A shows trends in the number of issuers and amount raised for both types of firms. Panel B further distinguishes between domestic and international issuances. Amount raised values are in billions of constant 2011 U.S. dollars (USD). The figure excludes China. A. New and Recurrent Bond Issuers A1. Number of Bond Issuers A2. Amount Raised 4,000 200 180 3,500 160 3,000 Number of issuers 140 Billion USD 2,500 120 2,000 100 1,500 80 60 1,000 40 500 20 0 0 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 New bond issuers Recurrent bond issuers B. New and Recurrent Bond Issuers: Domestic vs. International B1. Number of Bond Issuers B2. Amount Raised 3,500 140 3,000 120 Number of issuers 2,500 100 Billion USD 2,000 80 1,500 60 1,000 40 500 20 0 0 2005 2009 2013 2000 2001 2002 2003 2004 2006 2007 2008 2010 2011 2012 2014 2015 2016 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 New bond issuers, domestic issuances New bond issuers, international issuances Recurrent bond issuers, domestic issuances Recurrent bond issuers, international issuances Appendix Table 1. Economy Classification This table shows the list of economies that are included in the different regions. Emerging economies East Asia Eastern Europe and the Middle East and Advanced economies Latin America other Asia Africa China Bangladesh Argentina Bahrain Austria Hong Kong SAR, China Bulgaria Brazil Egypt Belgium Indonesia India Chile Jordan Canada Malaysia Kazakhstan Colombia Kuwait Cyprus Philippines Pakistan Costa Rica Morocco Denmark Republic of Korea Romania Mexico Nigeria Finland Singapore Russian Federation Panama Oman France Taiwan, China Sri Lanka Peru Qatar Germany Thailand Turkey Venezuela Saudi Arabia Greece Vietnam Ukraine South Africa Ireland Tunisia Italy United Arab Emirates Japan Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom United States Appendix Table 2. Size (Assets) of Corporate Bond Issuers This table shows OLS regressions of the size of East Asian 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 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. Advanced East Asia includes Hong Kong SAR, Korea, Singapore, and Taiwan. Developing East Asia includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. Dependent variable: size (in logs) of the median issuing firm per economy, industry, and period Bond market: Domestic International Sample of East Asia: All Excl. China Advanced Developing All Excl. China Advanced Developing Period 1999-07 -0.29 ** -0.29 ** -0.46 *** -0.12 -0.12 -0.06 -0.29 0.19 [0.12] [0.12] [0.14] [0.21] [0.16] [0.13] [0.18] [0.18] Period 2008-16 -0.68 *** -0.66 *** -0.72 *** -0.63 ** -0.17 0.02 -0.03 0.07 [0.16] [0.17] [0.18] [0.30] [0.17] [0.15] [0.21] [0.21] Economy-industry FE Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 225 198 97 101 194 172 91 81 No. of clusters 84 75 34 41 73 64 33 31 R-squared 0.05 0.05 0.07 0.05 0.00 0.00 0.01 0.01 Appendix Table 3. Changes in Financial Statements, excluding China This table shows OLS regressions of changes in balance sheet and income statement variables for listed East Asian bond issuers and non-issuers (excluding China) between 2000-07 and 2008-16. The dependent variables are at the firm-level and are averaged within periods, converted to log (1+value), and then winsorized at the 95%. The regressions estimate different effects for recurrent bond issuers, new bond issuers, and non-issuers. Recurrent bond issuers are firms that issued bonds after 2008 and had already issued bonds before 2008. New bond issuers are firms that issued bonds for the first time after 2008. Non-issuers are firms that did not issue bonds or equity after 2008. EBITDA means earnings before interest, tax, depreciation, and amortization; ICR means interest coverage ratio; ROE means return on equity. The regressions include firm fixed effects (FE). The bottom row reports the difference between the coefficients for new and recurrent issuers in the post period (2008-16) and the associated Wald test of whether this difference is statistically different from zero. 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. Interest Dependent variable: Debt Assets Leverage Cash CAPEX EBITDA ICR ROE expenses Post (non-issuers) 0.00 0.28 *** -0.03 *** 0.56 *** 0.00 0.18 *** -0.01 0.14 -0.18 *** [0.13] [0.02] [0.01] [0.02] [0.06] [0.05] [0.11] [0.18] [0.05] Post x recurrent bond issuers 0.62 *** 0.27 *** 0.04 ** 0.20 ** 0.29 *** 0.13 0.38 *** -0.06 0.08 [0.18] [0.08] [0.02] [0.09] [0.09] [0.11] [0.11] [0.16] [0.05] Post x new bond issuers 1.67 *** 0.50 *** 0.14 *** 0.26 *** 0.54 *** 0.33 *** 0.81 *** -0.34 ** -0.15 *** [0.19] [0.09] [0.02] [0.09] [0.11] [0.11] [0.11] [0.15] [0.04] Firm FE Yes Yes Yes Yes Yes Yes Yes Yes Yes No. of observations 9,986 9,440 9,752 7,000 9,206 7,194 828 658 5,576 No. of clusters 82 81 81 80 80 79 32 30 78 R-squared 0.80 0.94 0.80 0.88 0.86 0.90 0.94 0.81 0.67 Test: (post x new) - (post x recurrent) 1.05 *** 0.23 *** 0.09 *** 0.06 0.25 *** 0.21 ** 0.43 *** -0.28 -0.23 ***