Corporate leverage and currency crises
Abstract
This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending a fixed exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues are in a foreign currency and costs are at least partially in domestic. Interestingly, foreign borrowing by exporting firms doesn't change the qualitative results: if firms' debt is denominated in foreign currency, a larger depreciation is needed to restore incentives to invest. An important feature in our model is that in general exporting firms choose to finance investments with debt instead of equity. Currency depreciation is socially optimal if risky projects have a higher expected return than safe projects and if firms(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Article provided by Elsevier in its journal Journal of Financial Economics.
Volume (Year): 63 (2002)
Issue (Month): 2 (February)
Pages: 275-310
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Web page: http://www.elsevier.com/locate/inca/505576
Related research
Keywords:Other versions of this item:
- Bris, Arturo & Koskinen, Yrjö, 2000. "Corporate Leverage and Currency Crises," Working Paper Series in Economics and Finance 367, Stockholm School of Economics, revised 02 Jul 2001.
- Arturo Bris & Yrjo Koskinen, 2000. "Corporate Leverage And Currency Crises," Yale School of Management Working Papers ysm139, Yale School of Management, revised 01 Oct 2008.
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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