Working Paper: CEPR ID: DP13298
Authors: Valentina Bruno; Hyun Song Shin
Abstract: How do emerging market corporates fare during periods of currency depreciation? We find that non-financial firms that exploit favorable global financing conditions to issue US dollar bonds and build cash balances are also those whose share price is most vulnerable to local currency depreciation. In particular, firms' vulnerability to currency depreciation derives less from the foreign currency debt as such, but from the cash balances that are built up by using foreign currency debt. Overall, our results point to a financial motive for dollar bond issuance by emerging market firms in carry trade-like transactions that leave them vulnerable in an environment of dollar strength.
Keywords: emerging market corporate debt; currency mismatch; liability dollarization; global financial conditions
JEL Codes: E44; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| non-financial firms that issue US dollar bonds (G32) | vulnerability to local currency depreciation (F31) |
| accumulation of cash balances funded by dollar-denominated debt (F65) | vulnerability to local currency depreciation (F31) |
| large cash holdings accumulated through dollar-denominated debt (F34) | larger declines in stock prices during local currency depreciation (F31) |
| using dollar debt to fund cash reserves in local currency (F31) | increased financial vulnerability during local currency depreciation (F31) |
| dollar bond issuance (H63) | exposure during periods of dollar strength (F31) |
| vulnerability to local currency depreciation (F31) | larger declines in stock prices (G10) |
| significant increases in liquid financial asset holdings (G19) | larger declines in stock prices during domestic currency depreciation (F31) |