Signaling with debt currency choice

Egemen Eren, Semyon Malamud and Haonan Zhou

No 1067, BIS Working Papers from Bank for International Settlements

Abstract: We document that firms in emerging markets borrow more in foreign currency when the local currency actually provides a better hedge in downturns. Motivated by this fact, we develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. Crucially, the nature of this equilibrium depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using a granular dataset including more than 4,800 firms in 19 emerging markets between 2005 and 2021. Our results have implications for evaluating and mitigating risks arising from currency mismatches in corporate balance sheets.

Keywords: foreign currency debt; corporate debt; signaling; exchange rates (search for similar items in EconPapers)
JEL-codes: D82 F34 G01 G15 G32 (search for similar items in EconPapers)
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.bis.org/publ/work1067.pdf Full PDF document (application/pdf)
https://www.bis.org/publ/work1067.htm (text/html)

Related works:
Working Paper: Signaling with Debt Currency Choice (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:1067

Access Statistics for this paper

More papers in BIS Working Papers from Bank for International Settlements Contact information at EDIRC.
Bibliographic data for series maintained by Martin Fessler ().