nep-ifn New Economics Papers
on International Finance
Issue of 2020‒02‒17
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Global Corporate Debt during Crises : Implications of Switching Borrowing across Markets By Cortina Lorente,Juan Jose; Didier Brandao,Tatiana; Schmukler,Sergio L.
  2. Corporate investment and the exchange rate: The financial channel By Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra

  1. By: Cortina Lorente,Juan Jose; Didier Brandao,Tatiana; Schmukler,Sergio L.
    Abstract: This paper studies how crises prompted firms to switch borrowing across markets, impacting the amount borrowed, maturity, and currency denomination at the firm and aggregate levels. Using data on worldwide debt issuance from advanced and emerging economies, the paper shows that firms shifted their issuances between domestic and international syndicated loans and corporate bonds during financial crises. Firms reduced their borrowing in shock-hit markets but increased it in other debt markets. Firms also moved toward longer-term markets, maintaining (or even increasing) their borrowing maturity. As they moved toward domestic markets during international crises, firms reduced the share of foreign currency debt. The opposite occurred during domestic crises. Large firms were the ones that switched between international and domestic markets, affecting aggregate capital raising activity. The analysis of four distinct markets generates patterns consistent with credit supply shocks that are different from those obtained when studying the dynamics of individual markets.
    Date: 2020–02–06
  2. By: Ryan Niladri Banerjee; Boris Hofmann; Aaron Mehrotra
    Abstract: Using firm-level data for 18 major global economies, we find that the exchange rate affects corporate investment through a financial channel: exchange rate depreciation dampens corporate investment through firm leverage and FX debt. These findings are consistent with the predictions of a stylised model of credit risk in which exchange rates can affect investment through FX debt or borrowing in local currency from foreign lenders. Empirically, the channel is more pronounced in emerging market economies (EMEs), reflecting their greater dependence on foreign funding and their less developed financial systems. Moreover, we find that exchange rate depreciation induces highly leveraged firms to increase their cash holdings, supporting from a different angle the notion of a financial channel of the exchange rate. Overall, these findings suggest that the large depreciation of EME currencies since 2011 was probably a significant amplifying factor in the recent investment slowdown in these economies.
    Keywords: corporate investment, emerging markets, exchange rates, financial channel, financial constraints
    JEL: E22 F31 F41 O16
    Date: 2020–02

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