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

BIS Working Papers  |  No 712  | 
29 March 2018



We ask which firms borrow in international bond markets when global investors favour risky debt. Previous research suggests that international bond issuance increases when investors' risk appetite is high. We believe this effect could be stronger for firms that benefit more from the search for yield. In addition, we seek to understand what the risks might be for domestic economies.


We test if firms with a higher credit risk borrow more internationally when global risk appetite is high. This might occur, given that international investors charge such companies a higher credit spread, so that their funding costs will depend heavily on investors' risk appetite. To explore the issue we use micro-level data, combining firms' financial statements with bond-level data. Our data set covers a large sample of firms based in small open economies, and the period 2000-15.


We find that smaller, younger and less well known firms do borrow more from global investors when risk appetite is high. In addition, we show that, after three years, the additional funding increases debt levels. Our findings suggest how global financial conditions can affect local economies through risky firms and, more generally, that it is important to understand firm-level features when analysing cross-border flows of capital.



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.

JEL classification: F24, F36, G15, G30

Keywords: international bonds, credit risk, global risk appetite, firm-level data