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OVERVIEW

The IMF's Institutional View on the management of capital flows is a cornerstone in the Fund's advice to member countries. It postulates that inflow CFMs may provide benefits but also warns about their costs. This paper examines this issue by assessing the impact of inflow CFMs on firms’ domestic bond issuance. Using a novel dataset that combines firm-level bond issuance and balance sheet information across a wide range of emerging markets, alongside detailed data on capital controls related to bond issuance, we find that the imposition of these controls decreases the probability of firms issuing bonds. We identify a trade-off in the effectiveness of these policies, operating through two key channels that highlight the heterogeneity in their impact. First, we provide evidence of a “prudential channel,” where the reduction in bond issuance is more pronounced for riskier, more leveraged firms. Second, we uncover a “misallocation channel,” where more productive and efficient firms are disproportionately affected by the controls. However, only the prudential channel persists when analyzing firms' overall funding and investment—riskier firms reduce liabilities and investment, while more productive firms maintain their investment plans by substituting away from bond markets, including via reduced dividend payouts. We further examine how these dynamics vary across financial cycles—of domestic versus global origins—under different macroprudential regimes, and across alternative measures of risk. Finally, we discuss the policy implications of our findings.

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