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Currency Depreciation and Emerging Market Corporate Distress

53 Pages Posted: 12 Dec 2016 Last revised: 20 Nov 2017

Valentina Bruno

American University - Department of Finance and Real Estate

Hyun Song Shin

Bank for International Settlements

Date Written: November 19, 2017

Abstract

How do emerging market corporates fare during periods of currency depreciation? We find that non-financial firms that exploit favourable global financing conditions to issue US dollar bonds and build cash balances are also those whose share price is most vulnerable to local currency depreciation. In particular, firms' vulnerability to currency depreciation derives less from the foreign debt, per se, but from the cash balances that are funded by foreign debt. Overall, our results point to the existence of a financial channel that operates through corporate balance sheets, undermines creditworthiness in an environment of dollar strength, and plays a role in transmitting external financial conditions to the domestic financial system.

Keywords: emerging market corporate debt, currency mismatch, liability dollarization, global financial conditions

JEL Classification: E44, G15

Suggested Citation

Bruno, Valentina and Shin, Hyun Song, Currency Depreciation and Emerging Market Corporate Distress (November 19, 2017). Available at SSRN: https://ssrn.com/abstract=2883488 or http://dx.doi.org/10.2139/ssrn.2883488

Valentina Bruno (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

HOME PAGE: http://www.american.edu/kogod/faculty/bruno.cfm

Hyun Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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