How Does Currency Risk Impact Firms? New Evidence from Bank Loan Contracts

35 Pages Posted: 28 Mar 2022

See all articles by Mikael C. Bergbrant

Mikael C. Bergbrant

St. Johns University

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Delroy M. Hunter

University of South Florida

Date Written: December 24, 2021

Abstract

We use unique features of the private credit market to examine whether currency risk is a priced systematic risk at the firm level and, therefore, whether and how it affects firms’ financing. We find that currency exposure has a large impact on loan spreads. Decomposing loan spreads, we find that exposure increases the expected default risk premium and that internationalization, growth opportunities, and relationship intensify exposure’s impact. Further, exposure exacerbates firms’ financing risk by increasing the need for collateral, reducing loan maturity, inducing monitoring and covenant intensity, and influencing syndicate structure. However, exposure does not affect the expected return premium in loan spreads; hence, currency risk is not priced in the classical sense and, therefore, should not affect the “true” cost of debt. Our findings imply that while managers should be concerned about exposure’s impact on their access to, and terms of, bank financing, they should not adjust hurdle rates on account of exposure when assessing investment projects.

Keywords: exchange rate exposure, bank loan contracting, cost of debt, expected return premium, expected default risk premium, private credit market

JEL Classification: G12, G21, G32

Suggested Citation

Bergbrant, Mikael C. and Francis, Bill B. and Hunter, Delroy M., How Does Currency Risk Impact Firms? New Evidence from Bank Loan Contracts (December 24, 2021). Available at SSRN: https://ssrn.com/abstract=4021174 or http://dx.doi.org/10.2139/ssrn.4021174

Mikael C. Bergbrant

St. Johns University ( email )

8000 Utopia Parkway
Queens, NY 11439
United States
8134476288 (Phone)

HOME PAGE: http://www.bergbrant.com

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Delroy M. Hunter (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
813-974-6319 (Phone)

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