Information Asymmetry and Foreign Currency Borrowing by Small Firms
CentER Working Paper Series No. 2011-099
22 Pages Posted: 5 Sep 2011 Last revised: 29 May 2013
Date Written: February 19, 2013
We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues, more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.
Keywords: foreign currency borrowing, competition, banking sector, market structure
JEL Classification: G21, G30, F34, F37
Suggested Citation: Suggested Citation