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Firms' credit risk and the onshore transmission of the global financial cycle

Ramon Moreno and Jose Maria Serena Garralda

No 712, BIS Working Papers from Bank for International Settlements

Abstract: We investigate the role of firms' credit risk in the onshore transmission of international bond market conditions. We show that reductions in the global price of risk, measured by the excess bond premium, encourage more international bond borrowing by smaller and younger firms. Due to informational asymmetries, these firms pay a higher credit spread. Thus their funding costs, and consequently their international borrowing, are more tightly linked to the global price of risk. The funds borrowed in response to favourable market conditions cause their balance sheets to deteriorate; over a three-year horizon, leverage increases, in support of capital expenditure, and cash holdings increase. Our results reveal a micro-level link between rising global risk appetite and the gradual build-up of domestic vulnerabilities.

Keywords: international bonds; credit risk; global risk appetite; firm-level data (search for similar items in EconPapers)
JEL-codes: F24 F36 G15 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2018-03
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