Corporate dollar debt and depreciations: much ado about nothing?

Emerging-markets firms often carry foreign-currency debt on their balance sheets. Following a depreciation, the expanding 'peso' value of 'dollar' liabilities could, via a net-worth effect, offset the expansionary competitiveness effect. To assess which effect dominates, we use a...

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Bibliographic Details
Published in:The review of economics and statistics 2008-11, Vol.XC (4), p.612-626
Main Authors: Bleakley, Hoyt, Cowan, Kevin
Format: Article
Language:English
Subjects:
Competitiveness
Corporate debt
Corporate finance
Dollar
Exchange rates
Financial management
Foreign exchange
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Summary:Emerging-markets firms often carry foreign-currency debt on their balance sheets. Following a depreciation, the expanding 'peso' value of 'dollar' liabilities could, via a net-worth effect, offset the expansionary competitiveness effect. To assess which effect dominates, we use accounting data (including the currency composition of liabilities) for 450+ nonfinancial firms in five Latin American countries in the 1990s. We find that firms holding more dollar debt do not invest less than their peso-indebted counterparts following a depreciation. We also show that these firms match the currency denomination of their liabilities with the exchange rate sensitivity of their profits. Reprinted by permission of the MIT Press
ISSN:0034-6535