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Do Firms Believe in Interest Rate Parity?

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  • Matthew R. McBrady
  • Sandra Mortal
  • Michael J. Schill

Abstract

Using a broad sample of international corporate bond offerings, we provide evidence that corporate borrowers make opportunistic currency choices, in that they denominate the currency of their bonds in a manner that is inconsistent with a belief in either covered or uncovered interest rate parity. Using firm-level tests, we identify a number of characteristics of firms that engage in opportunistic behavior. We observe that large issuers located in developed markets with investment-grade ratings and low cash flow characterize those firms that are responsive to covered borrowing rate differences across currencies. Corporate responsiveness to uncovered borrowing rate differences appears more general. We observe that although the gains firms achieve through opportunistic currency denomination are economically significant, the yield differential tends to systematically decline after issuance. This finding suggests that opportunistic issuance by corporations may be a primary mechanism for driving covered interest yields toward parity. Copyright 2010, Oxford University Press.

Suggested Citation

  • Matthew R. McBrady & Sandra Mortal & Michael J. Schill, 2010. "Do Firms Believe in Interest Rate Parity?," Review of Finance, European Finance Association, vol. 14(4), pages 695-726.
  • Handle: RePEc:oup:revfin:v:14:y:2010:i:4:p:695-726
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    File URL: http://hdl.handle.net/10.1093/rof/rfq001
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    Cited by:

    1. Luna Azahara Romo González, 2016. "The drivers of European banks’ US dollar debt issuance: opportunistic funding in times of crisis?," Working Papers 1611, Banco de España;Working Papers Homepage.
    2. Murat Duran & Doruk Kucuksarac, 2012. "Are Swap and Bond Markets Alternatives to Each Other in Turkey?," Working Papers 1223, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    3. Massa, Massimo & Žaldokas, Alminas, 2014. "Investor base and corporate borrowing: Evidence from international bonds," Journal of International Economics, Elsevier, vol. 92(1), pages 95-110.
    4. Paul Mizen & Frank Packer & Eli Remolona & Serafeim Tsoukas, 2018. "Original sin in corporate finance: New evidence from Asian bond issuers in onshore and offshore markets," Discussion Papers 2018/04, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    5. repec:eee:intfin:v:52:y:2018:i:c:p:211-226 is not listed on IDEAS
    6. repec:bis:bisqtr:1709e is not listed on IDEAS

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