Exchange rate appreciations and corporate risk taking

BIS Working Papers  |  No 710  | 
27 March 2018



We ask whether firms take on more debt when their local currency appreciates against the US dollar and financial frictions are relaxed on the firm side. To answer this question, we use firm-level data from the ORBIS database on listed and non-listed firms in ten major Asian emerging market economies over the period of 2002 to 2015.


This paper is the first in the literature that provides direct evidence at the firm level on the risk-taking channel of currency appreciation by looking at all firms' foreign currency (FX) exposure. Since the ORBIS database does not break down firm-level debt by currency, we use BIS data on country-level FX loans and bonds and on total credit to calculate the country-level FX debt share. Then we apply this share to firms' total debt and obtain firm-level measures of FX debt.


We find that, when faced with local currency appreciation against the US dollar, firms with larger FX debt before the exchange rate appreciates, increase their leverage more than those with smaller FX debt after the appreciation. Such effects are stronger for firms in the non-tradable sector than those in the tradable sector.



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.

JEL classification: E0, F0, F1

Keywords: capital flows, exchange rates, FX borrowing, firm heterogeneity, firm leverage