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Exchange rate appreciations and corporate risk taking

Author

Listed:
  • Sebnem Kalemli-Ozcan
  • Xiaoxi Liu
  • Ilhyock Shim

Abstract

We test the risk taking channel of exchange rate appreciations using firm-level data from private and public firms in ten Asian emerging market economies during 2002-2015. Since foreign currency (FX) debt at the firm level is not observed for the Asian economies, we approximate the FX debt of a given firm by assuming that any given firm will hold a constant share of its total debt in foreign currency, where this share is given by the firm's country's share of FX liabilities in total liabilities. We measure risk taking by firm leverage. We show that firms with a higher volume of FX debt before the exchange rate appreciates, increase their leverage relatively more after the appreciation. Our results imply that more indebted firms become even more leveraged after exchange rate appreciations.

Suggested Citation

  • Sebnem Kalemli-Ozcan & Xiaoxi Liu & Ilhyock Shim, 2018. "Exchange rate appreciations and corporate risk taking," BIS Working Papers 710, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:710
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    References listed on IDEAS

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    1. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2017. "Foreign Currency Loans and Credit Risk: Evidence from U.S. Banks," CESifo Working Paper Series 6700, CESifo Group Munich.
    2. José María Serena & Ricardo Sousa, 2017. "Does exchange rate depreciation have contractionary effects on firm-level investment?," BIS Working Papers 624, Bank for International Settlements.
    3. Yusuf Soner Baskaya & Julian di Giovanni & Sebnem Kalemli-Özcan & Mehmet Fatih Ulu, 2017. "International spillovers and local credit cycles," Economics Working Papers 1559, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2017.
    4. Aguiar, Mark, 2005. "Investment, devaluation, and foreign currency exposure: The case of Mexico," Journal of Development Economics, Elsevier, vol. 78(1), pages 95-113, October.
    5. Kalemli-Ozcan, Sebnem & Sorensen, Bent E. & Villegas-Sanchez, Carolina & Volosovych, Vadym & Yesiltas, Sevcan, 2015. "How to construct nationally representative firm level data from the ORBIS global database," CEPR Discussion Papers 10829, C.E.P.R. Discussion Papers.
    6. Hoyt Bleakley & Kevin Cowan, 2008. "Corporate Dollar Debt and Depreciations: Much Ado About Nothing?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 612-626, November.
    7. George Allayannis & Gregory W. Brown & Leora F. Klapper, 2003. "Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia," Journal of Finance, American Finance Association, vol. 58(6), pages 2667-2710, December.
    8. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, vol. 94(4), pages 1183-1193, September.
    9. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    10. Stefan Avdjiev & Bryan Hardy & Sebnem Kalemli-Ozcan & Luis Servén, 2017. "Gross Capital Flows by Banks, Corporates and Sovereigns," NBER Working Papers 23116, National Bureau of Economic Research, Inc.
    11. Boris Hofmann & Ilhyock Shim & Hyun Song Shin, 2016. "Sovereign yields and the risk-taking channel of currency appreciation," BIS Working Papers 538, Bank for International Settlements.
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    Citations

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    Cited by:

    1. Georgios Georgiadis & Feng Zhu, 2019. "Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates," BIS Working Papers 797, Bank for International Settlements.
    2. Ramon Moreno & José María Serena Garralda, 2018. "Firms' credit risk and the onshore transmission of the global financial cycle," BIS Working Papers 712, Bank for International Settlements.
    3. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," BIS Working Papers 711, Bank for International Settlements.
    4. Kalemli-Ozcan, Sebnem, 2019. "US Monetary Policy and International Risk Spillovers," CEPR Discussion Papers 14053, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    capital flows; exchange rates; FX borrowing; firm heterogeneity; firm leverage;

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F0 - International Economics - - General
    • F1 - International Economics - - Trade

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