The impact of capital inflows on corporate financial flexibility: a review of market segmentation effects in developed emerging markets

Abstract

Within the last three decades, there have been large attempts for the globalization of the emerging markets that led to drastic capital inflows. These flows have very important outcomes for the financial markets and international market integration. Understanding these outcomes is very critical for the persistence of the inflows and their positive impact in emerging markets. This dissertation consists of two parts addressing interconnected issues in capital inflows to emerging markets and their corporate financial impacts: (1) the impact of emerging markets capital inflows on financial markets and international market integration, and (2) the impact of international market segmentation on corporate financial flexibility. In part 1, firstly, brief information on the capital inflow patterns in 10 advanced emerging markets1 is given. Then, the role of capital inflows in financial markets is investigated. The contribution of the capital inflows to international market integration is analyzed with risk diversification, financial and equity markets measures, which, to the best of my knowledge, have not been analyzed in a wide context before. Whether the patterns in the level of flows are systematically related to international market integration is questioned. Our results show that capital inflows improve market integration in emerging markets. In the second part of the dissertation, the impact of international market segmentation on capital structure decisions by firms is studied through financial flexibility. The results show the importance of capital inflows and their impact on advanced emerging markets at the firm level. Although markets are more integrated due to increasing capital inflows, it has negative effects for firm financial flexibility. Financial flexibility is shown to increase with international market segmentation. This finding is revealed by the comparative spare debt capacity ratios of the individual firms. !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1!At the beginning of the study, FTSE Global Index Series Country Classification Report for September 2010 was used for selecting the emerging countries to be studied. Brazil, Hungary, Mexico, Poland, South Africa and Taiwan were already in the Advanced Emerging markets category. According to 2010 results, it was stated that, Turkey, Malaysia and Czech republic were promoted to Advanced Emerging market status in June 2011. Thailand was in the watch list for 2011. It was also possible for Thailand to be promoted to the Advanced Emerging markets category in 2011. So, it is also included in the sample. However, in January 2014, Thailand is still in the Secondary Emerging market status. http://www.ftse.com/Indices/Country_Classification!