Do Firms Believe in Interest Rate Parity?

Review of Finance, Forthcoming

45 Pages Posted: 8 Mar 2008 Last revised: 18 Aug 2010

See all articles by Matthew R. McBrady

Matthew R. McBrady

University of Virginia - Darden School of Business

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Michael J. Schill

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 7, 2010

Abstract

Using a broad sample of international corporate bond offerings, we provide evidence that corporate borrowers make opportunistic currency choices, in that they denominate the currency of their bonds in a manner that is inconsistent with a belief in either covered or uncovered interest rate parity. Using firm-level tests, we identify a number of characteristics of firms that engage in opportunistic behavior. We observe that large issuers located in developed markets with investment-grade ratings and low cash flow characterize those firms that are responsive to covered borrowing rate differences across currencies. Corporate responsiveness to uncovered borrowing rate differences appears more general. We observe that although the gains firms achieve through opportunistic currency denomination are economically significant, the yield differential tends to systematically decline after issuance. This finding suggests that opportunistic issuance by corporations may be a primary mechanism for driving covered interest yields toward parity.

Keywords: Corporate borrowing, interest rate parity

JEL Classification: G14, G15, G32

Suggested Citation

McBrady, Matthew R. and Mortal, Sandra and Schill, Michael J., Do Firms Believe in Interest Rate Parity? (January 7, 2010). Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1101579

Matthew R. McBrady

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/mcbrady.htm

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Michael J. Schill (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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