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Exchange rate appreciations and corporate risk taking

Sebnem Kalemli-Ozcan, Xiaoxi Liu and Ilhyock Shim

No 710, BIS Working Papers from Bank for International Settlements

Abstract: We test the risk taking channel of exchange rate appreciations using firm-level data from private and public firms in ten Asian emerging market economies during 2002-2015. Since foreign currency (FX) debt at the firm level is not observed for the Asian economies, we approximate the FX debt of a given firm by assuming that any given firm will hold a constant share of its total debt in foreign currency, where this share is given by the firm's country's share of FX liabilities in total liabilities. We measure risk taking by firm leverage. We show that firms with a higher volume of FX debt before the exchange rate appreciates, increase their leverage relatively more after the appreciation. Our results imply that more indebted firms become even more leveraged after exchange rate appreciations.

Keywords: capital flows; exchange rates; FX borrowing; firm heterogeneity; firm leverage (search for similar items in EconPapers)
JEL-codes: E0 F0 F1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-rmg and nep-sea
Date: 2018-03
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