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Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia

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Author Info
George Allayannis (University of Virginia)
Gregory W. Brown (University of North Carolina at Chapel Hill)
Leora F. Klapper (The World Bank)

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Abstract

Using a data set of East Asian nonfinancial companies, we examine a firm's choice between local, foreign, and synthetic local currency (hedged foreign currency) debt. We find evidence of unique as well as common factors that determine each debt type's use, indicating the importance of examining debt at a disaggregated level. We exploit the Asian financial crisis as a natural experiment to investigate the role of debt type in firm performance. Surprisingly, we find that the use of synthetic local currency debt is associated with the biggest drop in market value, possibly due to currency derivative market illiquidity during the crisis. Copyright 2003 by the American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 58 (2003)
Issue (Month): 6 (December)
Pages: 2667-2710
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Handle: RePEc:bla:jfinan:v:58:y:2003:i:6:p:2667-2710

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  1. Jose M. Berrospide & Amiyatosh Purnanandam & Uday Rajan, 2008. "Corporate hedging, investment and value," Finance and Economics Discussion Series 2008-16, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Uluc Aysun & Melanie Guldi, 2008. "Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure," Working papers 2008-06, University of Connecticut, Department of Economics, revised Oct 2008. [Downloadable!]
  3. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Júnior, José L. R., 2008. "Exchange Rate Exposure, Foreign Currency Debt and the Use of Derivatives: Evidence from Brazil," Ibmec Working Papers wpe_139, Ibmec Working Paper, Ibmec São Paulo. [Downloadable!]
  5. Prasetyantoko, Agustinus, 2008. "Financing Policies and Firm Vulnerability in Indonesia," MPRA Paper 6533, University Library of Munich, Germany. [Downloadable!]
  6. Bartram, Söhnke M. & Brown, Gregory W. & Minton, Bernadette, 2009. "Resolving the Exposure Puzzle: The Many Facets of Exchange Rate Exposure," MPRA Paper 14041, University Library of Munich, Germany. [Downloadable!]
  7. Agustinus, Prasetyantoko, 2007. "Foreign Ownership and Firm Financing Constraint in Indonesia," MPRA Paper 6500, University Library of Munich, Germany. [Downloadable!]
  8. Brown, M. & Ongena, S. & Yesin, P., 2008. "Currency Denomination of Bank Loans: Evidence from Small Firms in Transition Countries," Discussion Paper 2008-16, Tilburg University, Center for Economic Research. [Downloadable!]
  9. Júnior, José L. R., 2008. "Corporate Financial Policies and the Exchange Rate Regime: Evidence from Brazil," Ibmec Working Papers wpe_142, Ibmec Working Paper, Ibmec São Paulo. [Downloadable!]
  10. Mihir A. Desai & C. Fritz Foley & Kristin J. Forbes, 2004. "Financial Constraints and Growth: Multinational and Local Firm Responses to Currency Crises," NBER Working Papers 10545, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Geert Bekaert & Campbell R. Harvey & Christian Lundblad & Stephan Siegel, 2004. "Global Growth Opportunities and Market Integration," NBER Working Papers 10990, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Ugur Lel, 2006. "Currency hedging and corporate governance: a cross-country analysis," International Finance Discussion Papers 858, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2006. "Capital Structure with Risky Foreign Investment," NBER Working Papers 12276, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Timothy Chue & David Cook, 2004. "Sudden Stops and Liability Dollarization: Evidence from East Asian Financial Intermediaries," Econometric Society 2004 Far Eastern Meetings 646, Econometric Society. [Downloadable!]
  15. Jose Luiz Rossi Junior, 2004. "Foreign Exchange exposure, corporate financial policies and the exchange rate regime: Evidence from Brazil," Econometric Society 2004 Latin American Meetings 163, Econometric Society. [Downloadable!]
  16. Aretz, Kevin & Bartram, Söhnke M., 2009. "Corporate Hedging and Shareholder Value," MPRA Paper 14088, University Library of Munich, Germany. [Downloadable!]
  17. Agustinus, Prasetyantoko, 2007. "Debt Composition and Balance Sheet Effect of Currency Crisis in Indonesia," MPRA Paper 6501, University Library of Munich, Germany. [Downloadable!]
  18. Agustinus, Prasetyantoko, 2007. "Corporate Responses to Currency Depreciations: Evidence from Indonesia," MPRA Paper 6502, University Library of Munich, Germany. [Downloadable!]
  19. Jacob Gyntelberg & Alicia Garcia Herrero & Andrea Tesei, 2008. "The Asian crisis: what did local stock markets expect?," BIS Working Papers 261, Bank for International Settlements. [Downloadable!]
  20. Allayannis, George & Brown, Gregory W. & Klapper, Leora F., 2005. "Legal effectiveness and external capital : the role of foreign debt," Policy Research Working Paper Series 3530, The World Bank. [Downloadable!]
  21. Jose Berrospide, 2008. "Exchange rates, optimal debt composition, and hedging in small open economies," Finance and Economics Discussion Series 2008-18, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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