Two Essays in Empirical Finance in Mexico

I write two chapters on emerging market finance in Mexico. The first chapter examines corporate finance, focusing on changes in the capital structure of firms following the inclusion of their stocks in the international equity index (MSCI Mexico). Utilizing a TWFE event study with staggered adoption, my analysis reveals that firms added to the MSCI Mexico Index increase their common stock while keeping total debt constant. I demonstrate that MSCI selects firms based on retained earnings. The rise in retained earnings, coupled with an expansion of common stock after the inclusion event and a consistent total debt, results in a reduction in leverage. Conversely, firms removed from the MSCI Mexico Index exhibit no significant changes in their capital structure. Additionally, I present novel evidence indicating that both added and deleted firms experience abnormal stock price returns on the immediate next trading day after their inclusion or removal from MSCI indexes for Mexico, Brazil, Chile, and Colombia. These findings contribute to the existing literature on the feedback effect from equity markets to real decisions within the context of emerging markets. In the second chapter, I investigate the empirical relationship between market shares (proportion of enrolled workers), returns, and fees within Mexico’s defined contribution pension system from 2012 to 2019. I explore variations in responses to these financial characteristics across four age groups. Employing panel cointegration tests and estimating an Error Correction Model, my analysis indicates that market shares, returns, and fees are interconnected in the long run for three out of four age groups. Stronger evidence emerges when combining all age groups into a unified specification.