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Financial Sector Volatility, Banking Market Structure and Exports

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Financial Sector Volatility, Banking Market Structure and Exports Pei-Chien Lin Department of Industrial Economics Tamkang University – PowerPoint PPT presentation

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Title: Financial Sector Volatility, Banking Market Structure and Exports


1
Financial Sector Volatility, Banking Market
Structure and Exports
  • Pei-Chien Lin
  • Department
    of Industrial Economics

  • Tamkang University

  • Ho-Chuan (River) Huang
  • Department
    of Banking and Finance

  • Tamkang University
  • April 21, 2014

2
1. Introduction Research background
  • Investigation on the finance-growth nexus has
    been one of the most prolific areas in the field
    of development, finance, and international
    economics.
  • Recently, a ramification extended to the
    literature of international trade suggests that
    financial development could also be a source of a
    countrys comparative advantage.

3
1. Introduction Research background
  • Theoretical literature Kletzer and Bardhan
    (1987) and Baldwin (1989) augmented the
    Hecksher-Ohlin model by incorporating a financial
    sector and shows that financial development gives
    countries a comparative advantage in industries
    relying more on external finance.
  • Several empirical studies, such as
    Beck(2002,2003), Svaleryd and Vlachos (2005), Hur
    et al.(2006) and Manova (2008) have provided
    evidence to support the theoretical prediction.

4
1. Introduction Research background
  • More recently, some studies have been extended to
    consider the impact of other financial features
    on real economic activities, such as considering
    the impact of financial volatility on economic
    growth, e.g., Loayza and Ranciere(2006) and Kim,
    Lin and Suen (2010), Lin and Huang (2012) and the
    impact of banking market structure on economic
    growth, e.g., Cetorelli and Gambera (2001) and
    Claessens and Laeven (2005).
  • Nevertheless, the literature has not paid much
    attention to examining the impacts of financial
    volatility and banking market structure on trade
    patterns so far. And studying this issue may shed
    light on the legitimacy of financial supervision
    and the reform of financial sector for those more
    open economies.

5
1. Introduction Rationale between financial
volatility and real activity
  • According to Mishkin (1999), asymmetric
    information between lender and borrower leads to
    two basic problems in the financial system
    adverse selection and moral hazard.
  • Financial instability (or volatility) generally
    will worsen the problems of adverse selection and
    moral hazard and thus drive up the possibility of
    lending bad credits. Consequently, lenders will
    be reluctant to make more loans, thereby possibly
    leading to a steep decline in lending and that
    will result in substantially lower investment and
    real economic activity.

6
1. Introduction Theoretical prediction between
banking market structure and real activity
  • On the positive side, less competitive system may
    lead to easier access to external financing
    because banks, with more market power, are more
    inclined to invest in information acquisition and
    customer relationship, e.g., Mayer (1988,1990)
    and Petersen and Rajan (1995).
  • Oppositely, the less competitive system may make
    the financial service more costly or with low
    quality, thereby reducing the effective demand of
    external financing and hence discouraging real
    activity, e.g., Pagano (1993).
  • Accordingly, linkage between banking market
    structure and real activity remains as an
    empirical issue.

7
1. Introduction Purpose of this paper
  • To complement the extant literature, this paper
    plans to further empirically assess the impacts
    of other financial features, such as financial
    sector volatility and banking market structure,
    on industrial export.

8
2. Methodology Empirical concerns (1)
  • Concern 1 reverse causality
  • -gt the performance of exports can be the
    source of financial sector volatility.
  • Solution Following Rajan and Zingales
    (thereafter RZ, 1998), we describe a channel
    through which the industries might grow
    differentially in countries where the channel is
    likely to be more operative.

9
2. Methodology Empirical concerns (1)
Country 1
External financing
Export
Industry 1 (high)
Banking industry with higher volatility
External financing
Industry 2 (low)
Export
Country 2
External financing
Industry 1 (high)
Export
Banking industry with lower volatility
External financing
Industry 2 (low)
Export
10
2. Methodology Empirical specification-(1)
  • Our benchmark regression is augmented
    from RZs
  • specification as
  • Exporti,kSk akCountryk Si ßi Industryi
  • d1(External financei Financial
    developmentk) ei,k
  • d2(External financei Financial sector
    volatilityk)
  • d3(External financei Banking market
    structurek)
  • Sm ?m Other Controlsm,i,k
    .
  • Where subscripts i and k denote the ith
    industry and kth
  • country respectively.

11
2. Methodology Empirical specification-(1)
  • Other controls added in specifications (1)
    include interaction terms suggested by the trade
    theory or empirical studies, which include
  • Human capital
  • Human Capital Intensityi Human Capital
    Levelk,1980
  • Physical capital
  • Capital Intensityi Capital Output
    Ratiok,1980
  • Resource endowment
  • Resource intensityi Natural resource
    stockk,1984

12
2. Methodology Empirical specification-(2)
  • In addition, firms asset may closely relate to
    financial development. For instance, Braun (2003)
    shows that in countries with lower financial
    development, industries with more tangible assets
    are relatively larger and grow faster.
  • Furthermore, this hypothesis has been extended to
    test the impact of the interaction between
    industrial asset tangibility and financial
    development of a country on trade by Hur et al.
    (2006) and Manova (2008).

13
2. Methodology Empirical specification-(2)
  • Exporti,k Sk akCountryk Si ßi
    Industryi
  • d1(External financei Financial
    developmentk) ei,k
  • d2(External financei Financial
    sector volatilityk)
  • d3(External financei Banking
    market structurek)
  • Sm ?m Other Controlsm,i,k
  • ?1(Tangibilityi Financial
    developmentk)
  • ?2(Tangibilityi Financial
    sector volatilityk)
  • ?3(Tangibilityi Banking market
    structurek)

14
2. Methodology Empirical concerns (2)
  • Concern 2 endogeneity
  • -gtthe shocks that trigger financial sector
    volatility can also affect export performance.
  • Solution we apply instrumental variable (IV)
    technique, using the legal origins of the country
    as instruments for financial development or
    financial volatility, to estimate the models.

15
3. Data
  • The data used in this study mainly obtained from
    Manova (2008), Braun (2003) and Beck et al.
    (2000, 2010).
  • The full sample contains 63 countries and 27
    industries, for the 1980-1997 period.
  • The variables are categorized into
    country-industry-specific, industry-specific and
    country-specific variables.
  • (1) Country-Industry-Level variable (i,k)
  • Export sharei,k share of industry is export in
    country k in country ks GDP.

16
3. Data
  • (2) Industry-Level variable (i)
  • External financei the fraction of investment not
    financed by internal funds.
  • Tangibilityi the ratio of net properties,
    plant and equipment
  • to book value of asset.
  • (3) Country-Level variable (k)
  • Private creditk the ratio of domestic private
    credit to
  • GDP in 1980.
  • Volatility of private creditk the standard
    deviation of
  • the growth of the private credit over GDP
    during the 1980-
  • 1997.
  • Bank concentrationk the share of the three
    largest banks
  • assets over all commercial banks averaged over
    the period
  • 1980-1997.

17
4. Results Benchmark results
18
4. Results summary for the benchmark results
1. The volatility and concentration of banking
industry respectively exert negative and positive
impacts on industrial exports. Nevertheless, the
positive impact of financial development
disappeared when these two financial features
considered. The result is robust to additional
controls considered. 2. The interaction of
banking industry volatility with asset
tangibility has statistically positive impact on
the relative exports of industries with more
tangible asset, showing that tangible assets can
serve as a collateral to ease access of finance
when confidence in the economy in low.
19
4. Results Robustness check (1) -alternative
measures of comparative advantage in trade
20
4. Results Robustness check (2)- alternative
measures of volatility in banking industry
21
4. Results Robustness check (3)- alternative
measures of market structure
22
4. Results Robustness check (4)- developed
countries vs. developing countries
23
5. Conclusion
  • The positive effect of financial development on
    industrial export via the channel of sectoral
    external financing is attenuated when other
    features of financial sector are considered.
  • Financial volatility and banking market structure
    respectively exert significantly negative and
    positive impacts on the export of industries that
    are more external financially dependent.
  • Our finding is robust to a variety of kinds of
    sensitivity tests.
  • To sum up, the findings from this study lend
    support to the notion that a more stable and
    concentrated banking system is important to the
    exports of those industries that rely more on
    external finance, especially so for those
    developing countries.

24
Thank you for your attention
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