His Pain Is Your Gain: Inter-Firm Linkages and Exchange Rate Exposure
Posted: 28 Mar 2022 Last revised: 19 Sep 2022
Date Written: August 28, 2022
How do exchange rate shocks permeate the corporate sector? Using multi-country firm-level data on foreign debt and production networks, I show that foreign debt borrowers experience heightened distress when hit by adverse exchange rate shocks, but they do not propagate distress to purely domestic firms horizontally or vertically. Instead, domestic rivals and suppliers exploit the financial vulnerability of connected foreign debt borrowers and gain from an enhanced strategic advantage in competition and supplier relationships, resulting in a drop in credit risk and a rise in stock price and future profitability.
Keywords: Corporate Debt, Financial Distress, Supply Chain, Monetary Policy Shocks, Firm-Level Data
JEL Classification: F31, F34, G32, G33, L11, L14
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