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Foreign Currency Debt, Investment and Exit Choices in the Cross Section of Firms

Author

Listed:
  • Liliana Varela

    (University of Houston)

  • Juliana Salomao

    (University of Minnesota)

Abstract

This paper studies firms' debt composition, investment opportunities and exit choices in developing economies. We develop a model and show that deviations from the uncovered interest rate parity lead exporters and non-exporters to hold foreign currency denominated debt. Our theoretical framework shows that smaller firms with greater growth opportunities choose higher levels of foreign currency debt to invest and expand their scale of operations. In addition, the model shows that exporters have greater incentives to undertake foreign currency debt, as imperfect exchange rate pass-through affect their revenues relatively more. We confirm the model’s implications using firm-level census data on firms’ financing and investment choices around the years of the Great Recession.

Suggested Citation

  • Liliana Varela & Juliana Salomao, 2016. "Foreign Currency Debt, Investment and Exit Choices in the Cross Section of Firms," 2016 Meeting Papers 1422, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1422
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