Exchange Rate Appreciations and Corporate Risk Taking

We test the risk taking channel of exchange rate appreciations using firm-level data from private and public firms in ten Asian emerging market economies during 2002-2015. Since foreign currency (FX) debt at the firm level is not observed for the Asian economies, we approximate the FX debt of a given firm by assuming that any given firm will hold a constant share of its total debt in foreign currency, where this share is given by the firm's country's share of FX liabilities in total liabilities. We measure risk taking by firm leverage. We show that firms with a higher volume of FX debt before the exchange rate appreciates, increase their leverage relatively more after the appreciation. Our results imply that more indebted firms become even more leveraged after exchange rate appreciations.

Keywords: capital flows, exchange rates, FX borrowing, firm heterogeneity, firm leverage

JEL Classification: E0, F0, F1

Suggested Citation: Suggested Citation

Kalemli-Ozcan, Sebnem and Liu, Xiaoxi and Shim, Ilhyock, Exchange Rate Appreciations and Corporate Risk Taking (March 2018). BIS Working Paper No. 710, Available at SSRN: https://ssrn.com/abstract=3150386