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Firms' credit risk and the onshore transmission of the global financial cycle

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  • Ramon Moreno
  • José María Serena Garralda

Abstract

We investigate the role of firms' credit risk in the onshore transmission of international bond market conditions. We show that reductions in the global price of risk, measured by the excess bond premium, encourage more international bond borrowing by smaller and younger firms. Due to informational asymmetries, these firms pay a higher credit spread. Thus their funding costs, and consequently their international borrowing, are more tightly linked to the global price of risk. The funds borrowed in response to favourable market conditions cause their balance sheets to deteriorate; over a three-year horizon, leverage increases, in support of capital expenditure, and cash holdings increase. Our results reveal a micro-level link between rising global risk appetite and the gradual build-up of domestic vulnerabilities.

Suggested Citation

  • 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.
  • Handle: RePEc:bis:biswps:712
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    Cited by:

    1. Charles W. Calomiris & Mauricio Larrain & Sergio L. Schmukler, 2018. "Capital Inflows, Equity Issuance Activity, and Corporate Investment," NBER Working Papers 24433, National Bureau of Economic Research, Inc.
    2. Calomiris, Charles W. & Larrain, Mauricio & Schmukler, Sergio L., 2021. "Capital inflows, equity issuance activity, and corporate investment," Journal of Financial Intermediation, Elsevier, vol. 46(C).

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    More about this item

    Keywords

    international bonds; credit risk; global risk appetite; firm-level data;
    All these keywords.

    JEL classification:

    • F24 - International Economics - - International Factor Movements and International Business - - - Remittances
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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