How the Global Financial Crisis and International Trade Affected Corporate Decisions?: International Evidence

Introduction

Research on international trade has focused on the role of economies of scale and cross-country differences in productivity and factor endowments in predicting gains from trade and the pattern of aggregate trade flows according to comparative advantage. Additional insights have emerged from introducing firm heterogeneity in trade participation when there are fixed and variable trade costs. (Foley & Manova, 2015, p. 1)

Country-level factors may influence corporate finance decisions, which capture firm heterogeneity. Specifically, international trade has also an impact on corporate decisions as Foley & Manova (2015) state. After the irrelevant proposals of Modigliani & Miller (1958, 1963), the literature of corporate finance literature grows to extend by examining financial crises, such as the 1997-1998 Asian Crisis, 2000 dot-com Crisis, the global financial crisis of 2007-2009 (GFC), 2010-2012 Eurozone Debt Crisis. Notably, the GFC has profoundly affected economics at both country-level and firm-level. However, the question of how the joint effect of the GFC and international trade on corporate decisions has not been sufficiently investigated by the literature yet, that is why this chapter intends to fill this gap in the literature.

To date, while some research has reviewed the literature on the relationship between international trade and corporate finance, no single study exists which empirically investigates this relationship in a financial crisis context.

The GFC originated firstly in the subprime mortgage market in the United States (US) in the second half of 2007, reached its peak worldwide following the collapse of Lehman Brothers in September 2008 and sustained its effect until June 2009 (Kahle & Stulz, 2013). The GFC has spread across trade links, international banks and particularly financial markets around the globe and influenced many economic sectors (Ahn et al., 2011; Berkmen et al., 2012). The GFC also affected firms across the globe, whereas other financial crises (1997-1998 Asian Crisis, 2010-2012 Eurozone Debt Crisis) only had impacts that were confined to companies or within specific regions (Mian & Sufi, 2015). Also, the GFC is also known as the Great Recession (Gertler & Gilchrist, 2018) because it has been the biggest recession since 1929, the Great Depression. Therefore, to understand the impact of the GFC on corporate decisions may open new insights new insights to realize what the world economy should project on the link between trade and corporate decisions in the aftermath of Covid-19.

Specifically, Foley & Manova (2015) review the emerging new literature regarding the association between international trade and corporate finance, but the empirical analyses of this literature remain untested. Therefore, this chapter empirically investigates the relationship between international trade and corporate decisions, cash, debt and dividend in particular by considering the role of the GFC in this relationship across the globe.

Specifically, this chapter first reviews the discussions in corporate finance literature in the context of the GFC by considering international trade and then empirically assesses the question of how the GFC and international trade affected corporate decisions employing the international data, including 82 countries, from 2002 to 2016.