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Is Foreign Exchange Risk Priced in Bank Loan Spreads?

Author

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  • Young Sang Kim

    (Northern Kentucky University)

  • Junyoup Lee

    (Ulsan National Institute of Science and Technology)

  • Ha-Chin Yi

    (Texas State University)

Abstract

This study investigates the effects of foreign exchange (FX) exposure on bank loan spreads. Private bank loans are a major form of corporate financing in both developing and developed countries. However, the international component of credit risk in bank loan pricing has been largely ignored. Controlling for firm- and loan-level characteristics, our results show that firm-level FX exposure is positively related to loan spreads. The results imply that, if other loan and firm characteristics remain constant, syndicated loan lenders view FX exposure as an additional risk factor that can impede future loan repayments. As a result, lenders price borrowing firms’ FX exposure, driven by cash flow volatility and foreign operation. The results are robust to different measures of FX exposure, firm fixed effects, cash flow volatility, and controlling for other confounding factors. Our findings are consistent with those of prior international finance studies that document a positive relation between firm-level cash flow volatility and FX exposure and provide important implications for MNCs and policymakers involved with cross-country operations.

Suggested Citation

  • Young Sang Kim & Junyoup Lee & Ha-Chin Yi, 2021. "Is Foreign Exchange Risk Priced in Bank Loan Spreads?," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 1061-1092, October.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:3:d:10.1007_s11156-021-00970-9
    DOI: 10.1007/s11156-021-00970-9
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    More about this item

    Keywords

    Foreign exchange exposure; Syndicated loan; Credit risk; International diversification; Internationalization; Cash flow volatility;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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