Template-Type: ReDIF-Paper 1.0
Author-Name: Egemen Eren
Author-X-Name-First: Egemen
Author-X-Name-Last: Eren
Author-Name: Semyon Malamud
Author-X-Name-First: Semyon
Author-X-Name-Last: Malamud
Author-Name: Haonan Zhou
Author-X-Name-First: Haonan
Author-X-Name-Last: Zhou
Title: Signaling with debt currency choice
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.
Creation-Date: 2023-01
File-URL: https://www.bis.org/publ/work1067.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1067.htm
File-Format: text/html
Number: 1067
Keywords: foreign currency debt, corporate debt, signaling, exchange rates
Classification-JEL: D82, F34, G01, G15, G32
Handle: RePEc:bis:biswps:1067