Alfaro, Chari & Kanczuk: The Real Effects of Capital Controls – Credit Constraints, Exporters and Firm Investment


This paper evaluates the effects of capital controls on firm-level stock returns and real investment using data from Brazil. Theory suggests that the imposition of capital controls can drive up the cost of capital and curb investment. Credit constraints are also more likely to bind for firms that are more dependent on external finance. The data suggest that there is a significant decline in cumulative abnormal returns for Brazilian firms following the imposition of capital controls in 2008-2009 consistent with an increase in the cost of capital. Conditioning on firm-characteristics such as firm size and export status, the data suggest that large firms and the largest exporting firms are less affected by the controls. Firms that are more dependent on external finance are however more adversely affected by the controls. The evidence is consistent with the hypothesis that capital controls increase market uncertainty and reduce the availability of external finance, which in turn lowers investment at the firm-level.


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