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Information Asymmetry and Foreign Currency Borrowing by Small Firms

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  • Brown, M.
  • Ongena, S.
  • Yesin, P.

    (Tilburg University, Center for Economic Research)

Abstract

We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2011-099.

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Date of creation: 2011
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Handle: RePEc:dgr:kubcen:2011099

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Keywords: foreign currency borrowing; competition; banking sector; market structure;

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Cited by:
  1. Stephan Barisitz, 2011. "Nonperforming Loans in CESEE – What Do They Comprise?," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 4.
  2. Fidrmuc, Jarko & Hake, Mariya & Stix, Helmut, 2013. "Households’ foreign currency borrowing in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 37(6), pages 1880-1897.

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