Is Foreign Exchange Risk Priced in Bank Loan Spreads?

Young Sang Kim, Junyoup Lee () and Ha-Chin Yi
Additional contact information
Young Sang Kim: Northern Kentucky University
Junyoup Lee: Ulsan National Institute of Science and Technology
Ha-Chin Yi: Texas State University

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 3, No 9, 1092 pages

Abstract: Abstract This study investigates the effects of foreign exchange (FX) exposure on bank loan spreads. Private bank loans are a major form of corporate financing in both developing and developed countries. However, the international component of credit risk in bank loan pricing has been largely ignored. Controlling for firm- and loan-level characteristics, our results show that firm-level FX exposure is positively related to loan spreads. The results imply that, if other loan and firm characteristics remain constant, syndicated loan lenders view FX exposure as an additional risk factor that can impede future loan repayments. As a result, lenders price borrowing firms’ FX exposure, driven by cash flow volatility and foreign operation. The results are robust to different measures of FX exposure, firm fixed effects, cash flow volatility, and controlling for other confounding factors. Our findings are consistent with those of prior international finance studies that document a positive relation between firm-level cash flow volatility and FX exposure and provide important implications for MNCs and policymakers involved with cross-country operations.

Keywords: Foreign exchange exposure; Syndicated loan; Credit risk; International diversification; Internationalization; Cash flow volatility (search for similar items in EconPapers)
JEL-codes: F31 G32 G33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-021-00970-9 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
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:kap:rqfnac:v:57:y:2021:i:3:d:10.1007_s11156-021-00970-9

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-021-00970-9

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().