Corporate Leverage and Currency Crises

Posted: 17 Aug 2008

See all articles by Arturo Bris

Arturo Bris

IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance

Yrjo Koskinen

Haskayne School of Business, University of Calgary

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002


This paper provides an explanation of currency crises based on an argument that bailing out financially distressed exporting firms through a currency depreciation is ex-post optimal. Exporting firms have profitable investment opportunities, but they will not invest because high leverage causes debt overhang problems. The government can make investments feasible by not defending an exchange rate and letting the currency depreciate. Currency depreciation always increases the profitability of new investments when revenues from that project are in foreign currency and costs denominated in the domestic currency are nominally rigid. Although currency depreciation is always ex-post optimal once risky projects have been taken and failed, it can be harmful ex-ante, because it leads to excessive investment in risky projects even if more valuable safe projects are available. However, currency depreciation is also ex-ante optimal if risky projects have a higher expected return than safe projects and if firms are forced to rely on debt financing because of underdeveloped equity markets.

Keywords: currency depreciation, debt overhang, emerging markets, efficient investment policy, excessive risk taking

JEL Classification: F34, G15, G31, G32

Suggested Citation

Bris, Arturo and Koskinen, Yrjo J, Corporate Leverage and Currency Crises (June 2002). Journal of Financial Economics (JFE), Vol. 63, No. 2, 2002, Available at SSRN:

Arturo Bris

IMD International ( email )

Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels


Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

Yrjo J Koskinen (Contact Author)

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
+1-403-220-5540 (Phone)


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