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The boom of corporate debt in emerging markets: Carry trade or save to invest?

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  • De Gregorio, José
  • Jara, Mauricio

Abstract

The decline in international interest rates following the global financial crisis encouraged firms in emerging markets to increase their corporate bond issuance abroad. Evidence shows that issuing offshore debt increases cash holdings, suggesting firms may exploit interest rate arbitrage. We argue that increasing contemporaneous cash holdings may also be undertaken for a “save to invest” motive to finance future investment opportunities. Using a sample of nonfinancial listed firms from 15 emerging market economies from 2001 to 2016, we show that companies accumulate cash when carry trade is favorable; however, we find that the increased cash holdings substantially revert in the following two periods, consistent with arguments for a “save to invest” motive. Indeed, offshore debt has a significant impact on both current and next-year investment.

Suggested Citation

  • De Gregorio, José & Jara, Mauricio, 2024. "The boom of corporate debt in emerging markets: Carry trade or save to invest?," Journal of International Economics, Elsevier, vol. 148(C).
    • Handle: RePEc:eee:inecon:v:148:y:2024:i:c:s0022199623001307
    DOI: 10.1016/j.jinteco.2023.103844
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    Keywords

    Emerging markets; Offshore debt; Carry trade; Corporate investment;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G00 - Financial Economics - - General - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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