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Information Asymmetry and Foreign Currency Borrowing by Small Firms

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  • Brown, M.

    (Tilburg University, School of Economics and Management)

  • Ongena, S.

    (Tilburg University, School of Economics and Management)

  • Yesin, P.

Abstract

We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information, if foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk. Thus information asymmetry between banks and firms can be a potential driver of "dollarization" in credit markets.
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  • Brown, M. & Ongena, S. & Yesin, P., 2011. "Information Asymmetry and Foreign Currency Borrowing by Small Firms," Other publications TiSEM ebc0da7f-1886-4209-a528-d, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:ebc0da7f-1886-4209-a528-d665054bdac4
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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