Working Paper: CEPR ID: DP14419
Authors: Leonardo Gambacorta; Sergio Mayordomo; Jose Maria Serena Garralda
Abstract: We explore the link between firms’ dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). Consistent with previous research, we first document that firms substitute domestic for dollar borrowing when they have higher dollar revenues or long-term assets and when the corporate basis widens. Importantly, our novel firm-level dataset enables to show that when these funding opportunities appear, the currency substitution is stronger for high-grade firms, as they can offer to investors close substitutes for safe dollar assets. However, firms with higher dollar revenues or long-term assets do not react to changes in the corporate basis. Altogether, the composition of dollar borrowers shifts when the basis widens, as high-grade firms gain importance, relative to firms with operational needs.
Keywords: Covered Interest Rate Parity; Credit Spread; Debt Issuance; Dollar Convenience Yield; Foreign Exchange Rate Hedge; Limits of Arbitrage
JEL Codes: E44; F3; F55; G12; G15; G23; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Corporate Basis (L20) | Dollar Borrowing (F34) |
| Widening Corporate Basis (G38) | Increased Dollar Issuances (F31) |
| High-Grade Firms (L10) | Responsiveness to Changes in Corporate Basis (G38) |
| Higher Dollar Revenues/Long-term Assets (G32) | No Reaction to Corporate Basis Changes (G39) |
| Corporate Basis Widening (H32) | Shift in Composition of Dollar Borrowers (F65) |
| Corporate Basis (L20) | Share of Dollar Bonds as Fraction of Total Borrowing (F34) |