'Loyal friends' and 'fickle lenders': The behavior of foreign financial institutions and investors during shocks

This dissertation consists of three essays on the behavior of foreign financial institutions and investors during shocks and its determinants. The key general finding is that foreign players' lending and investment behavior tends to be more sensitive to shocks particularly in the market segments that suffer greater information asymmetry and where borrowers are relatively 'unimportant' to the lender. The degree to which these players' financing behavior is elastic to shocks depends on: 1) the availability of risk capital for the lenders or investors; 2) the severity of information asymmetry between the lenders or investors and the borrowers; 3) the extent to which lenders internalize the costs of borrowers' bankruptcy.;The first essay compares the credit cutback behavior between foreign bank branches and domestic financial institutions in four Asian countries during the Asian financial crisis. By applying within-firm fixed effects approach to the firm-level data, this essay resolves the common identification problems and finds that foreign banks in fact contracted their lending more than domestic financial institutions during the crisis. The cutback was most severe against small and medium-sized local firms and less drastic vis-a-vis firms with foreign equity stakes. It also finds evidence that the cutback was due to 'panic-related' rather than just 'disciplinary-related' reasons.;The second essay examines the impact of external shocks on the behavior of foreign investors in Thai stock market. Using novel econometric approach to unique data on the net flows of foreign investment into the Thai stock market between 1999-2006, the essay finds that even when controlling for various returns and stocks' characteristics, external shocks have significant impact on foreign net flows into Thai equities for medium-sized stocks and those with smaller number of analyst coverage. It also finds that the results are partly being driven by the often-neglected 'within-country flight-to-quality' effects whereby investors switch from 'riskier' towards 'safer' stocks after large negative shocks. This effect is most pronounced during periods of high global uncertainty.;The third essay explores, in a cross-country setting, whether lending countries' existing economic exposure to borrowing countries can make them less likely to cut back credits during the 2008-9 global financial crisis and other shock episodes. By utilizing the panel structure of the dataset, the essay controls for lender- and borrower-specific factors to highlight the importance of the lender-borrower trade and financial linkages. The main finding is that the higher economic linkage can increase lenders' credit flows to borrowers during shocks up to a certain point when financial exposure triggers overexposure concerns forcing lenders to contract their credit supply. The overexposure concerns are more serious during shocks that are focused around the lending countries such as the 2008 episodes.