ESSAYS IN INTERNATIONAL FINANCE

Abstract

My dissertation consists of three essays on international capital flows. In the first essay, titled "Do small firms benefit more from foreign portfolio investment? Evidence from a Natural Experiment," I test whether an increase in the supply of foreign portfolio capital benefits small firms by using the Thai government's unique restriction on capital inflows as a natural experiment. The Thai government imposed a very stringent capital control on December 19, 2006, and then quickly abandoned it one day later. Although many other studies have been plagued with the difficulty of separating the impact of foreign capital from the impact of other concurrent events, this experiment helps me solve the time-series identification problem. My results suggest that foreign portfolio investment helps large firms the most, contrary to existing evidence, which finds a benefit in foreign portfolio investment for small firms. I also investigate the importance of other firm characteristics correlated with size, which includes a firm's exchange rate exposure, foreign ownership, and political connection. The next two essays are on the dynamic patterns of international mergers and acquisitions. In the second essay, I uncover key facts about international M&As by estimating a variety of reduced form models. I find that: (1) Cross-border mergers come in waves that are highly correlated with business cycles. (2) Most mergers occur when both the acquirer and the target economies are booming. (3) Merger booms have both an industry-level component (productivity shocks) and a country-level component (financial shocks). (4) Across over one million observations, acquirers tend to be more productive and targets tend to be less productive, compared to their industry peers. These facts are consistent with the neoclassical theory of mergers in which productive firms expand overseas to seize new investment opportunities, but not with the widely held views that most cross-border mergers occur when the target economies are in a recession or face a financial crisis. In the third essay, I construct a dynamic structural model of cross-border mergers and integrate the important facts above into the model. This dynamic structural approach allows me to quantify the effects of productivity and financial shocks on M&A decisions. In addition, this approach provides a proper analytical framework for conducting policy experiments. As an example of such analyses, I investigate the impact of President Obama's proposal on multinational corporation taxation. My simulation results suggest that the foreign operation tax has economically significant effects on productive firms and can be very distortionary for cross-border mergers.