Anusha Chari

Contact Information:

Associate Professor of Economics
301 Gardner Hall
CB #3305 Department of Economics 
University of North Carolina at Chapel Hill
Chapel Hill, NC  27599
Office Phone: (919)966-5346  
achari@email.unc.edu

Professor Chari's research is in the fields of open-economy macroeconomics, international finance and empirical corporate finance. Her most recent work uses firm-level data to examine the effects of financial globalization on topics such as outbound FDI from emerging-markets, cross-border M&A, the political economy of protectionism, the rate of return to capital in capital-poor countries and the evolution of India’s industrial composition following liberalization. Her earlier work on stock market liberalization uncovers new stylized facts about the interaction of real and financial markets using firm-level data. These facts complement a growing body of literature that documents the importance of financial development for economic growth.

Anusha received a PhD in International Finance from The Anderson School at UCLA and an undergraduate degree in Philosophy, Politics and Economics from Balliol College at Oxford University. In addition to teaching at the University of North Carolina, she has taught both international and finance courses at University of Chicago's Booth School of Business , the University of Michigan, and the Haas School of Business at Berkeley. She is also a Faculty Research Fellow in the National Bureau of Economic Research’s International Finance and Macroeconomics Program.

Publications

"Risk Sharing and Asset Prices: Evidence from a Natural Experiment." Journal of Finance, Vol. 59, No. 3, pp. 1295-1324 (with Peter Blair Henry). Nominated for Smith Breeden prize for the best paper published in the Journal of Finance, 2004.

When countries liberalize their stock markets, firms that become eligible for foreign purchase (investible), experience an average stock price revaluation of 15.1 percent. Since the historical covariance of the average investible firm's stock return with the local market is roughly 200 times larger than its historical covariance with the world market, liberalization reduces the systematic risk associated with holding investible securities. Consistent with this fact: (1) the average effect of the reduction in systematic risk is 6.8 percentage points, or roughly two fifths of the total revaluation; and (2) the firm-specific revaluations are directly proportional to the firm-specific changes in systematic risk.

"Heterogeneous Market-Making in Foreign Exchange Markets: Evidence from Individual Bank Responses to Central Bank Interventions." Journal of Money, Credit and Banking, Vol. 39, No.5, pp. 1131-1161, 2007. Appendix 1 , Appendix 2

Using high-frequency data this paper finds strong evidence that, on average, central bank interventions lead to increased volatility and a widening of bid-ask spreads in the intra-day market for foreign exchange. The results also show that there is dispersion in the bid-ask spread revisions posted by individual banks in response to the central bank entering the market. The findings are consistent with predictions from standard models of market microstructure with heterogeneous agents and have implications for the market power of central banks as well as the payoff generated by trading large amounts of international reserves.

In the three-year period following stock market liberalizations, the growth rate of the typical firm's capital stock exceeds its pre-liberalization mean by an average of 4.1 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 10-percentage point increase in a firm's expected future sales growth predicts a 2.9- to 3.5-percentage point increase in the growth rate of its capital stock, depending on the specification; country-specific changes in the cost of capital are also important, generating an economically and statistically significant change in capital stock growth in almost every specification; firm-specific changes in risk premia do not affect investment.

This paper investigates the influence of incumbent firms on the decision to allow foreign direct investment into an industry. Based on data from India's economic reforms, the results suggest that firms in concentrated industries are more successful at preventing foreign entry, that state-owned firms are more successful at stopping foreign entry than similarly placed private firms, and that profitable state-owned firms are more successful at stopping foreign entry than unprofitable state-owned firms. These findings continue to hold after controlling for industry characteristics such as the presence of natural monopolies and the size of the workforce. The pattern of foreign entry liberalization supports the private interest view of policy implementation.

"The Value of Control in Emerging Markets" Review of Financial Studies, vol. 23, No. 4, pp. 1741-1770, 2010 (with Paige Ouimet and Linda Tesar).

When a developed-country multinational firm acquires majority control of a firm in an emerging market, there is an economically large and statistically significant increase in the acquiring firms' stock price. Between 1986-2006 developed-market acquirers experience positive and significant abnormal returns of 1.16%, on average, over a three-day event window. Positive acquirer returns and dollar value gains appear unique to emerging-market M&A and are not replicated when the same developed-market acquirers take over firms in developed markets. The size of the stock price increase is more pronounced: (a) the weaker the contracting environment in the emerging market and (b) for industries with high asset intangibility.

"India Transformed? Insights from the Firm Level 1988-2007" Brookings India Policy Forum Journal 2010, Vol. 6, pp. 155-228, with Laura Alfaro. Read about this paper in the The Economist, Business Standard , and Business World .

Using firm-level data this paper analyzes, the transformation of India’s economic structure following the implementation of economic reforms. The focus of the study is on publicly-listed and unlisted firms from across a wide spectrum of manufacturing and services industries and ownership structures such as state-owned firms, business groups, private and foreign firms. Detailed balance sheet and ownership information permit an investigation of a range of variables such as sales, profitability, and assets. Here we analyze firm characteristics shown by industry before and after liberalization and investigate how industrial concentration, the number, and size of firms of the ownership type evolved between 1988 and 2005. We find great dynamism displayed by foreign and private firms as reflected in the growth in their numbers, assets, sales and profits. Yet, closer scrutiny reveals no dramatic transformation in the wake of liberalization. The story rather is one of an economy still dominated by the incumbents (state-owned firms) and to a lesser extent, traditional private firms (firms incorporated before 1985). Sectors dominated by state-owned and traditional private firms before 1988-1990, with assets, sales and profits representing shares higher than 50%, generally remained so in 2005. The exception to this broad pattern is the growing importance of new and large private firms in the services sector. Rates of return also have remained stable over time and show low dispersion across sectors and across ownership groups within sectors.

"Foreign Direct Investment in India’s Retail Bazaar: Opportunities and Challenges" World Economy, Vol. 35, No. 1, pp. 79-90, 2012 (with Madhav Raghavan)

Despite encouraging signs, India’s retail market remains largely off-limits to large international retailers like Wal-Mart and Carrefour. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers and infant industry arguments to protect the organized domestic retail sector that is at a nascent stage. Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports.

"Capital Market Integration and Wages" Forthcoming American Economic Journal-Macroeconomics (with Peter Henry and Diego Sasson)

For three years after the typical emerging economy opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of three. No such increase occurs in a control group of countries that do not liberalize. The temporary increase in wage growth drives up the level of the average worker’s annual compensation by $487 U.S.—an increase equal to nearly one-fifth of their annual pre-liberalization salary. Overall, the results suggest that trade in capital may have a larger impact on wages than trade in goods.

"Foreign Ownership and Firm Performance: Emerging Market Acquisitions in the United States" Forthcoming IMF Economic Review An earlier version circulated as NBER Working Paper No. 14786. Read about this paper in the NBER Digest, June 2009.

This paper examines the recent upsurge in foreign direct investment by emerging-market firms into the United States. Traditionally, direct investment flowed from developed to developing countries, bringing with it superior technology, organizational capital, and access to international capital markets, yet increasingly there is a trend towards “capital flowing uphill” with emerging market investors acquiring a broad range of assets in developed countries. Using transaction-specific information and firm-level accounting data we evaluate the operating performance of publicly traded U.S. firms that have been acquired by firms from emerging markets over the period 1980-2006. Our empirical methodology uses a difference-in-differences approach combined with propensity score matching to create an appropriate control group of non-acquired firms. The results suggest that emerging country acquirers tend to choose U.S. targets that are larger in size (measured as sales, total assets and employment) relative to matched non-acquired firms. In the years following the acquisition target firm sales and employment decline while profitability rises compared to matched non-acquired firms, suggesting significant restructuring of the target firms.

Published Comments

Book Review of "Boom Bust Cycles and Financial Liberalization" Journal of Economic Literature, Vol. 45, No. 4, pp. 1024-1093, 2007.

Comments on "Capital Flows and Exchange Rate Volatility: Singapore's Experience," in NBER Volume "International Borrowing, Capital Flows and Capital Controls in Emerging Economies: Policies, Practices and Consequences," Sebastian Edwards ed., University of Chicago Press, 2007.

"The Transformation of India: Incumbent Control, Reforms and Newcomers," with Laura Alfaro. VoxEU, Center of Economic and Policy Research, December 2009.

"US still holds key to equities markets," Op-ed in the Financial Express, January 2010.

Working Papers

"Does Liberalization Promote Competition?" (with Laura Alfaro)

Theory predicts that deregulation can affect the degree of competition between firms by reducing and redistributing rents, leading to new distributions of firms within industries over time. Using firm-level data from India, this paper investigates the competitive effects of liberalization on firm size and profitability in the manufacturing sector. The data suggest that average firm size declines significantly in industries that liberalized entry: firm entry occurs from the left hand tail of the size distribution with more small firms entering the market while the largest incumbent firms get significantly bigger following deregulation. The marginal entry of small firms is consistent with an increase in competition following entry liberalization. Consistent with a decline in monopoly power, the Herfindahl index of firm sales also shows a significant decline. Further, quantile regressions show significant non-linearity and a heterogeneous impact of deregulation on size: average firm size increases till around the 15th percentile, then gets smaller till the 90th percentile while firms in the largest percentile (95%) get significantly bigger over the sample period. Policy concerns that small firms would be driven out following deregulation and that foreign firms would displace domestic incumbents do not appear to be borne out by the data.