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International Pecking Order

Author

Listed:
  • Egemen Eren

    (Bank for International Settlements (BIS) - Monetary and Economic Department)

  • Semyon Malamud

    (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Haonan Zhou

    (Princeton University - Department of Economics)

Abstract

We document that corporates in emerging markets borrow more in foreign currency when the local currency provides a better hedge in downturns. We develop an international corporate finance model in which firms facing adverse selection choose the foreign currency share of their debt. In the unique separating equilibrium, good firms optimally expose themselves to currency risk to signal their type. The nature of this equilibrium crucially depends on the co-movement between cash flows and the exchange rate. We provide extensive empirical evidence for this signalling channel using micro data for firms in multiple emerging markets and event studies of local currency depreciation episodes.

Suggested Citation

  • Egemen Eren & Semyon Malamud & Haonan Zhou, 2022. "International Pecking Order," Swiss Finance Institute Research Paper Series 22-15, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2215
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    Keywords

    Foreign currency debt; corporate debt; signalling; exchange rates; pecking order;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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