Friday, 14 February, 2014 | 11:00 | Defense - PhD

Peter Tóth: “Essays on Foreign Capital, External Finance and Trade of European Firms”

Dissertation Committee:
Lubomír Lízal (chair)
Ronald W. Anderson
Štěpán Jurajda
Petr Zemčík
Krešimir Žigić



The dissertation is composed of three chapters studying empirical questions of corporate finance, European integration and international trade using firm-level data. The first chapter is focused at the macroeconomic and firm-specific determinants of attracting foreign investors to Czech firms before Czech EU membership. The second chapter deals with testing the effect of introducing the European single currency on the likelihood of equity and corporate debt issues by firms in the eurozone. The third chapter asks to what extent can cheaper imported inputs offset the loss in export sales due to domestic currency appreciation in Czech manufacturing firms around the EU accession period.

In the first chapter we study what factors attract foreign capital to Czech firms during the mid-transition, pre-EU-accession period 1997-2002. While the foreign owners' influence on firm performance has been widely studied, the same is not true for the opposite direction of causality. We consider macroeconomic, industry- and firm-level indicators of a firm's attractiveness to foreign capital. Using panel data techniques, we estimate linear models, limited dependent variable models and a hazard model with foreign ownership as the response variable. We find that foreign investors are likely to come from countries with higher corporate taxes and labor costs compared to the Czech Republic. As regards firm-level indicators, foreign investors favor larger firms, larger market shares and high concentration of ownership. Contrary to what we expected, indicators of the financial performance of a company did not seem to be significant attractors of foreign capital.

In the second chapter we test whether the introduction of the euro increased the likelihood of equity and corporate debt issues by firms in the eurozone. We hypothesize that the euro led to lower foreign exchange risks and transaction costs for international investors. This reduced the costs of issuing equity and corporate debt. Using a panel of about 6,000 Western European listed firms observed from 1995 to 2002, we estimate the likelihood of issuing equity or debt before and after eurozone entry and compared to firms with no “eurozone experience”. At the same time, individual leverage targets, firm size and profitability are taken into account. We find a positive euro effect for issuing debt and external finance in general. A positive effect for issuing equity holds only in industries with heavy external finance dependence. Furthermore, the findings are consistent with other studies and capital structure theories suggesting that firms tend to revert to their leverage targets.

In the third chapter we ask to what extent can Czech exporters cushion the impact of currency appreciation shocks by using imported intermediates. A partial equilibrium model with heterogeneous firms is applied. Producers can serve the domestic market, export final goods, or import inputs. In the model, an exogenous exchange rate shock simultaneously affects the variable costs and revenues associated with exports and imports. The impact of a hypothetical 1% appreciation of the domestic currency on sales is estimated using a panel of 7,356 Czech manufacturing firms observed from 2003 to 2006. The estimates are identified from within-firm variation in trade strategies, which is probably associated with the lifting of trade barriers due to Czech EU membership since 2004. For firms that both export and import, a drop in total sales of 0.2%, a drop in export sales of 0.8%, and a rise in domestic sales of 0.2% are predicted.

Full Text: “Essays on Foreign Capital, External Finance and Trade of European Firms” by Peter Tóth