10
Although this is an important idea, it hasn’t been previously tested
in a convincing fashion. Professor Mukherjee uses the phased
establishment of Debt Recovery Tribunals (DRT) in India – which
reduced the time taken to settle debt recovery cases, reducing
enforcement costs – and studies its impact on firms’ debt and asset
maturity structure. Analyzing panel data on publicly listed and
unlisted firms, Professor Mukherjee’s study finds that this judicial
reform led to a reduction in the proportion of short term debt,
allowing firms to invest in assets with longer maturities. They also
find that the firms reduced the number of banks they borrowed
from in the post-reform period, as predicted by Diamond.
The paper highlights an important link between the enforcement
costs and the nature of assets the firms can invest in. Although firms
can compensate for poor legal environments by borrowing short
term debt from multiple lenders, high enforcement costs reduce
the availability of long term finance for firms, preventing them from
investing in long term assets. Thus improvements in the legal system
in emerging markets are not only important for reducing firms’
exposure to rollover risk and consequent financial fragility, but also
to encourage long-term investments.
The Ease of Doing Business Index constructed by the World Bank
ranks the institutional quality of countries based on 10 indicators,
one of which is “enforcing contracts”. Enforcement costs can
include, for example, the efficiency with which parties to a contract
can be made to adhere to its terms by a country’s judicial system. In
the context of emerging economies, weak enforcement frameworks
could undermine the willingness of banks to lend to firms. The
paper by Professor Mukherjee (with co-authors Gopalan and Singh)
uses empirical methods to show that such situations can be partly
remedied if firms borrow short term debt from multiple lenders.
Douglas Diamond, in his presidential address to the American
Finance Association in 2004, suggests that short-term debt by itself
may not be sufficient. If there is only one lender involved, then it
may be possible for the borrower to force the lender to renegotiate
and take a ‘haircut’. But, if there are multiple lenders, then each of
the lenders has an added worry discouraging them to take a haircut
– are the benefits of the haircut actually accruing to a competing
co-lender who does not renegotiate? Companies know lenders
are unlikely to renegotiate, and try their best not to enter a default
scenario.
RESEARCH HIGHLIGHT: SUSTAINING EXTERNAL FINANCE IN
A POOR LEGAL SYSTEM
Radhakrishnan Gopalan, Abhiroop Mukherjee, and Manpreet Singh: Do Debt Contract
Enforcement Costs Affect Financing and Asset Structure? (2014)
Account Imbalances by Kang Shi from The Chinese University
of Hong Kong.
In the session on Public Finance and Education, Xiaobo Lu
from Texas A&M University presented his study Interjurisdiction
Political Competition and Fiscal Extraction in China, and Binzhen
Wu from Tsinghua University explored China’s higher education
in the presentation Matching Mechanism, Matching Quality and
Strategic Behavior: Evidence from China. Chang-tai Hsieh from
Booth School of University of Chicago chaired the session on
Labor, the Family and Macroeconomics, in which Lena Edlund
from Columbia University presented Foreign Brides and the
Domestic Front – The Case of Taiwan, Jacqueline Oliveira from
Yale University presented The Value of Children: International
Transfers, Fertility and Human Capital, and Keyu Jin from LSE
presented the One-Child Policy and Household Savings in China.
The closing session had three speakers discussing Political
Economy in China. Ruixue Jia from University of California San
Diego presented her study Pollution for Promotion, Bei Qin
from Hong Kong University (HKU) examined The Determinants
of Media Bias in China, and Chenggang Xu from HKU delivered
his research results on the Political Economy of Private Firms in
China.
The presentations and following discussions stimulated
intellectual exchanges between the speakers and the audience.
Ample opportunities for interaction were created for Ph.D
students and young researchers seeking new research ideas
and collaboration possibilities.
HKUST Institute for Emerging Market Studies (IEMS) hosted the
6th annual meeting of the China Economics Summer Institute
(CESI) in August 2013 at the Hong Kong University of Science
and Technology. Co-sponsored by the Institute for Advanced
Study, Department of Economics, and Division of Social Science
of HKUST, it is CESI’s first meeting in Hong Kong.
China Economics Summer Institute has the objective to
create a network and community of leading scholars working
on China’s economic development. It is organized by a
consortium of organizations from universities including HKUST,
University of Chicago, University of California at Berkeley,
Catholic University of Leuven, Peking University, and Tsinghua
University. This year’s CESI Hong Kong meeting brought
together more than 40 researchers for two and a half days
of research presentations, engaging the participants in active
discussions on issues related to public finance, international
trade, labor and family, and political economy in China.
The conference commenced with a session on Economic
Geography, in which John Marrow from the London School
of Economics and Political Science (LSE) presented his work
Productivity as if Space Mattered: An Application to Factor
Markets across China, and Kerem Cosar from the University
of Chicago Booth School of Business spoke on Internal
Geography, International Trade and Regional Outcomes. The
next session on Trade had three papers presented, including
Trade Liberalization, Quality and Export Prices by Amber Li from
HKUST, China’s Pure Exporter Subsidies by Alejandro Riano
from University of Nottingham, and Trade Reforms and Current
CHINA ECONOMICS SUMMER INSTITUTE 2013
(2013.8.22-24)
