Do Firms Believe in Interest Rate Parity?

Abstract

We find that firms alter the currency composition of their international bond issues to respond to differences in borrowing rates across currencies. For a broad sample of international corporate bonds denominated in six major currencies, we find strong and consistent evidence that firms respond to apparent departures from both covered and uncovered interest parity in their financing decisions. Emerging market and non-investment grade issuers are less likely to respond to differences in covered yields consistent with their limited access to currency swap markets. Overall, the gains that firms achieve are economically significant but consistent with well-functioning markets.

Keywords: Interest rate parity, international bonds, currency timing, opportunistic financing

JEL Classification: G32, F31