International Trade and the Currency Composition of Corporate Debt

This paper provides novel empirical evidence on the role of international trade in shaping the currency composition of corporate debt. We address endogeneity concerns by proposing a novel method to construct an instrumental variable for firms’ export shares using both domestic and South Korea’s trading partners’ industry-level demand shocks. Cross-sectional patterns, long difference regression, and IV regression results are all consistent with our theoretical prediction that firms with higher export shares borrow larger shares of debt in foreign currency. We validate our theory further by showing that: (1) our results are robust to dropping firms that potentially use financial hedge against exchange rate risk; (2) the effects of export shares were less pronounced during a less flexible exchange rate regime; and (3) higher shares of imported intermediate inputs in firms’ total cost tend to lower their foreign currency debt shares. Together, these findings shed light on the discussion of exchange rate policy in emerging and developing countries where foreign currency debts are pervasive.