Corporate financial policies and the exchange rate regime: Evidence from Brazil

Abstract

ResumoEste trabalho analisa o relacionamento entre a política financeira das empresas e o regime cambial para uma amostra de empresas brasileiras não-financeiras no período de 1996 a 2006. Os resultados indicam que, além de reduzir a proporção da dívida expressa em moeda estrangeira e aumentar a utilização de derivativos, a adoção de um regime de câmbio flutuante leva a um maior casamento monetário entre a ativo e o passivo das firmas. O trabalho mostra que esta melhora no gerenciamento de risco das firmas dá-se, principalmente, nas firmas mais expostas ao risco cambial. Os resultados confirmam que o regime cambial exerce um papel importante na determinação da vulnerabilidade externa das firmas. Palavras-Chave: Dívida, Regime cambial, Exposição, Proteção, Derivativos. AbstractThis paper analyzes the relationship between companies' financial policies and the exchange rate regime for a sample of non-financial Brazilian companies from 1996 to 2006. The results indicate that besides reducing the proportion of companies debt denominated in foreign currency and increasing the use of currency derivatives, the adoption of a floating exchange rate regime is shown to improve the match between the currency composition of companies' assets and liabilities. The paper also shows that this reduction in companies' currency mismatches is more pronounced for companies in the highest quantile of foreign exposure; therefore the results confirm that the exchange rate regime plays an important role in the determination of companies' foreign vulnerability. JEL classification: F31; F41; G15; G32.Keywords: Debt composition, Hedging, Use of derivatives, Exposure, Exchange rate regime. Área: Macroeconomia, Economia Monetária e Finanças. Address: Rua Quatá 300, Vila Olímpia, São Paulo-SP, Brazil. Tel.: + 55 11 4504 2437; Fax: +55 11 4504 2350. E-mail address: joselrj1@isp.edu.br IntroductionAdverse external shocks represent a key source of risk for emerging markets. In these countries, several episodes of crises and economic downturns were triggered by external factors.1 One question levied by the literature is whether the exchange rate regime plays a role in reducing countries' vulnerability to these shocks.Following a sequence of financial crises in the 1990s, a new generation of currency crises models placed corporate behavior at the center of the debate about the relationship between countries' external vulnerability and the exchange rate regime. In these models, a fixed exchange rate regime would increase countries' vulnerability by leading companies to disregard the exchange rate risk, biasing their borrowing towards foreign currency denominated debt and/or reducing their hedging activities.2 In opposition, a floating exchange rate regime would help countries to mitigate their external vulnerability by inducing companies to take seriously their exchange rate exposure.

How using derivatives affects bank stability in emerging countries? Evidence from the recent financial crisis

“…According to Rossi (2009), companies based in emerging markets suffer more from derivatives market volatility than companies from more developed economies. For these reasons, emerging country companies have started to increasingly invest in a conservative risk policy, by using derivative instruments correctly and with greater transparency in their earnings releases to the market.…”

How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America

“…As a result, most of Brazilian companies' foreign currency borrowing is obtained abroad (whether bond issuances, bank loans, or suppliers' credit). 32 A number of recent papers model the firms' choice of currency denomination of borrowing (see Allayannis, Brown, and Klapper (2003), Gelos (2003) and Rossi (2009)). 33 Thus, we do not restrict a given firm to maintain the same status during the whole sample.…”

Is the exchange rate exposure puzzle really a puzzle? International evidence

“…Two main reasons have been proposed to explain why the exchange rate regimes might affect the exchange rate exposure. First, Rossi (2009) argues that fixed regimes are associated with lower exchange rate volatility which would reduce firms' desires to hedge exchange rate risk and thus higher exchange rate exposure. In addition, the "moral hazard hypothesis" proposed by Eichengreen and Hausmann (1999) suggests that given the commitment from the central bank to defend the peg, firms believe themselves to be immune to exchange rate fluctuations, and thus are less likely to hedge the exchange rate risk.…”