The Impact Mechanism Of Financial Factors During Export Collapse: A View From Capital Market Imperfection

During the recent financial crisis of 2008-09, world economy was trapped into the most severe recession since the Great depression of 1930 s. But during recent recession, international trade was suffered more than domestic total output or total sales. Some scholars cal ed the phenomenon of trade drops in much more extent than domestic output or sales ‘trade collapse’. Though some research about trade collapse was done, it was confirmed into empirical studies with paradox results with little theoretical analysis and lacking systematic analysis, needless to say the impact mechanism of financial factors during the trade collapse. In this thesis, we will systematical y study the impact mechanism of financial factors during the export collapse of 2008-09 theoretically and empirically from the supply side with a view from capital market imperfection. Though the thesis will only focus on the financial factors of supply side, it will not in conflict with the mechanism of disrupt of Global Value Chain or inventory adjust by exporter & importer which were be emphasized in recent study. The mechanism of our thesis will be stronger if we take these aspects into consideration.The content and conclusion of main chapters of this thesis are as follow.Chapter 1. In this part, we give a theoretical analysis about the impact mechanism of financial factors during the “export collapse” based on literature study about macroeconomics of Great Depression, New-New trade theory, capital market imperfection and financial constraint in the field of corporate finance, trade credit, and literature about trade collapse during 2008-09 financial crisis. In this section, we find that financial factors play an important role in the “export collapse” mainly through its destruction of firms “borrowing-lending” relationship. Paying large sum of sunk costs in advance, longer transaction time and higher risks comparing to domestic firms make export firms need external finance or financial institutions’ participation for international transaction. Thus, formal ‘borrowing-lending’ relationships(e.g. loan) or informal “borrowing-learning” relationship(e.g. trade credit) are established between industrial firms and financial institutions. Through the channels of financial contacts’ non-indexation, debt-inflation, banking capital and stability, etc., financial impulse caused destruction of “borrowing-lending” relationships between firms and financial institutions which will constraint firms’ export ability. By two way feedback mechanism, firms’ export and financial constraint will be trapped into a bad loop of “financial constraint become heavy → firms’ export drop → firms’ financial constraint become heavier → firms’ export drop more → …” under the impulse of financial crisis, which will make export drops much more extent than domestic sales or output and make financial factors play an important role in export collapse.Chapter 2. Based on theoretical analysis in chapter 1, we test how firms’ export behavior and financial constraint influence each other, using firm-level data during 1998-2007 from Chinese Industrial Enterprises Database. The empirical studies of financial constraint and firms’ export behavior are be done from three aspects: “capital costs”, the definition of financial constraint in corporate finance; investment cash flow sensitive; cash flow sensitive of cash. The empirical results confirm that financial constraint and firms’ export behavior do have two way response mechanism. The paradox results of former relate empirical study were mainly caused by the way they weight financial constraint inappropriately. Firms’ financial constraint will change according to macro-economy environment and capital and financial markets’ situation is a common conclusion in the field corporate finance. Thus, the empirical results of this chapter will not only confirm that firms’ constraint aggravation under financial crisis impulse will influence firms’ export, but also confirm that financial factors can play an important role in export collapse by putting firms’ financial constraint and export behavior into a ‘bad’ loop of “firms constraint aggravation → export decrease → firms constraint become more aggravation → export decrease more → …”.Chapter 3. We tests how firms’ export were influenced by financial vulnerability, external finance costs and the impulse of 2008-09 financial crisis, also using firm-level data from Chinese Industrial Enterprises Database. The empirical results show that financial crisis aggravate firms’ financial vulnerability and increases firms’ external capital costs etc., which caused the destruction of firms’ former “borrowing-lending” relationships, confining firms’ export ability, lending to a larger extent drop of export than domestic sales. This mechanism makes financial factors play an important role in export collapse during 2008-09. This chapter can be seen as a micro-level test for the mechanism which was analyzed in chapter 1.Chapter 4. This paper explore the impact of firms’ external financial constraint, caused by the fluctuation of systematic risks and macroeconomic factors including 2008-09 financial crisis impulse, to the American export fluctuation based on literature study, directed acyclic graph(DAG) and VAR model. The conclusions are as follow: though systematic firm’s external financial constraint impulse and American export fluctuation have interaction impacts during long term, systematic firm’s external financial constraint impulse cause export fluctuation in the same period; systematic firm’s external financial constraint gets its impact on American export fluctuation through its affection to biggest size firms which are small quantities but are playing dominant role in both international trade and aggregate fluctuations. As firms’ external financial constraint will destruct firms “borrowing-lending” relationships, increase external capital costs etc., this chapter can be viewed as macro-level empirical study for financial factors in export collapse during the financial crisis.Chapter 5. This section gives a brift conclusion and a further study expectation.