Author Abstract
Using a unique confidential dataset with industry-level disaggregation of official U.S. securities claims and liabilities, we uncover the following facts. Dollar-denominated securities are largely intermediated through tax havens-financial centers (THFC) and by less-regulated funds. These securities are risky and respond to tax rates and prudential regulations, suggesting tax avoidance motives and regulatory arbitrage. Issuers are mostly multi-nationals, investing in intangible assets, hence easily movable across borders but with high uncertain collateral values. Investors require high Sharpe ratio, a clear indication of search-for yield. In contrast, safe Treasuries are mainly held by the foreign official sector and increased at the time of the quantitative easing policies. We rationalize these facts with a model in which multi-nationals, heterogeneous in the default probabilities, enter THFC to shift profits and access funding through offshore intermediaries. An increase in global savings, by reducing debt costs, raises firms' profits. This in turn reduces funds' monitoring incentives. Debt spreads appear elusively low as the ex-post default probability is now higher.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: March 2020
- HBS Working Paper Number: HBS Working Paper #20-099
- Faculty Unit(s): General Management
