We examine the firm- and country-level determinants of the currency denomination of small business loans. We first 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, and also examines the impact of information asymmetry between banks and firms. When foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firms revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. We then test the implications of our model by using a 2005 survey with responses from 9,655 firms in 26 transition countries. The survey contains details on 3,105 recent bank loans. At the firm level, our findings suggest that firms with foreign currency income and assets are more likely to borrow in a foreign currency. In contrast, firm-level distress costs and financial transparency affect the currency denomination only weakly. At the country level, the interest rate advantages of foreign currency funds and the exchange rate volatility do not explain the foreign currency borrowing in our sample. However, foreign bank presence, weak corporate governance and the absence of capital controls encourage foreign currency borrowing. All in all, we cannot confirm that "carry-trade behavior" is the key driver of foreign currency borrowing by small firms in transition economies. Our results do, however, support the conjecture that banking-sector structures and institutions that aggravate information asymmetries may facilitate foreign currency borrowing.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Swiss National Bank in its series Working Papers with number
2009-2.
Length: 79 pages Date of creation: 01 Feb 2009 Date of revision: Handle: RePEc:ris:snbwpa:2009_002
Contact details of provider: Postal: B�rsenstrasse 15, P. O. Box, CH - 8022 Z�rich Phone: +41 44 631 31 11 Fax: +41 44 631 39 11 Email: Web page: http://www.snb.ch/ More information through EDIRC
For technical questions regarding this item, or to correct its listing, contact: (Enzo Rossi).
Find related papers by JEL classification: F34 - International Economics - - International Finance - - - International Lending and Debt Problems F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G30 - Financial Economics - - Corporate Finance and Governance - - - General
This paper has been announced in the following NEP Reports: