Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment?

Serena, José María; Sousa, Ricardo M.

doi:10.2139/ssrn.3139024

Cited by 23 publications

(19 citation statements)

References 58 publications

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“…Section 5 concludes and provides some policy implications. 9 While we use a new firm-level dataset with comprehensive information on Asian firms' FX liabilities, our results are consistent with those of Alfaro et al (2017) and Serena and Sousa (2017). Alfaro et al (2017) find that the interaction between the firms' overall leverage and depreciation of domestic currency against USD negatively impact the firms' Z''-score.…”

supporting

confidence: 70%

“…We show that FX loans indeed explain the results. Serena and Sousa (2017) find that the interaction between domestic currency depreciation and the amount of USD denominated bond on firms' balance sheet is negatively correlated with firms' investment. Our paper goes beyond the existing literature by providing a comprehensive measure of leverage in USD, including both bank loan and bond issuances.…”

mentioning

confidence: 84%

“…Second, we construct a new and comprehensive dataset of the currency decomposition of corporate debt. Previous works such as Serena and Sousa (2017) and used only bond issuance denominated in U.S. dollar as a measure of U.S. dollar debt portion at corporate level. Though corporate bond issuance in U.S. dollar has increased rapidly in recent years, syndicated loans are still the dominant source of foreign currency debt issuance for not only larger firms but also for medium-and small-sized corporates.…”

Section: Introductionmentioning

confidence: 99%

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The Turning Tide: How Vulnerable are Asian Corporates?

Saadi-Sedik¹,

Jiang²

2019

IMF Working Papers

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Using a new firm-level dataset with comprehensive information on Asian firms' FX liabilities, we show that Asia's nonfinancial corporate sector is vulnerable to a tightening of global financial conditions. Higher global interest rates and exchange rate depreciation increase the probability of default of Asian firms. A 30 percent currency depreciation is associated with a two-notch downgrade in the corporate credit rating (e.g., from A to BBB+), resulting in 7 percent of Asian firms falling into bankruptcy. But the impact is nonlinear-as the firms' FX liability increases, the balance sheet channel of exchange rate offsets, then dominates, the competitiveness channel. The balance sheet channel offsets the competitiveness channel when the share of U.S. dollar debt is between 10 and 20 percent. We also find that currency depreciation increases firm-level investment on average, but for firms with the share of FX liabilities above 20 percent, investment contracts with depreciation. JEL Classification Numbers: F31, F41, F43, G01, G10, G15, G30, G31.

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supporting

confidence: 70%

mentioning

confidence: 84%

Section: Introductionmentioning

confidence: 99%

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The Turning Tide: How Vulnerable are Asian Corporates?

Saadi-Sedik¹,

Jiang²

2019

IMF Working Papers

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“…For firm‐level variables, we follow Serena and Sousa () and use the dividend ratio (DPR), to control for the degree of financial constraints. Recent literature has shown that financial constraints matter for the firms’ risk and expected returns (see Lamont, Polk, & Saaá‐Requejo, ; Livdan, Sapriza, & Zhang, ; Whited & Wu, ).…”

Section: Empirical Strategymentioning

confidence: 99%

Regulatory quality, financial integration and equity cost of capital

Nagaraj

Zhang

2019

Rev International Economics

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We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.

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“…13 Furthermore, for emerging and developing economies, even small currency depreciations are often contractionary events. If domestic firms and banks borrow in dollar, but equity is denominated in domestic currency, a depreciation, increases debt service payments and lowers the capacity to invest (see Serena and Sousa, 2017). Moreover, investment may decline further due to an international borrowing constraint: after a depreciation the collateral value of assets denominated in domestic currency falls and makes it more difficult to borrow from abroad (see Braggion, Christiano, and Roldos, 2009).…”

Section: B State-dependent Effectsmentioning

confidence: 99%

Is Credit Easing Viable in Emerging and Developing Economies? An Empirical Approach

Jacome

Sedik²,

Ziegenbein³

2018

IMF Working Papers

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During the global financial crisis, many central banks in advanced economies engaged in credit easing. These policies have been perceived as largely successful in reducing stress in financial markets, thus avoiding larger output losses. In this paper, we study empirically whether credit easing is also a viable policy tool to cope with banking crises in emerging and developing economies. We find that credit easing leads to a sharp increase in domestic currency depreciation, high inflation, and a substantial reduction in economic growth in a large panel of emerging and developing economies. For advanced economies, we find the effects to be benign. Our results suggest that emerging and developing economies should be cautious when using credit easing as it may fuel adverse macroeconomic repercussions.

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Does Exchange Rate Depreciation Have Contractionary Effects on Firm-Level Investment?

Abstract: WP624 Does exchange rate depreciation have contractionary effects on firm-level investment? 1 Does exchange rate depreciation have contractionary effects on firm-level investment? The implications of alternative types of bond financing

Cited by 23 publications

References 58 publications

The Turning Tide: How Vulnerable are Asian Corporates?

The Turning Tide: How Vulnerable are Asian Corporates?

Regulatory quality, financial integration and equity cost of capital

Is Credit Easing Viable in Emerging and Developing Economies? An Empirical Approach

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