Do Firms Believe in Interest Rate Parity?

33 Pages Posted: 24 Feb 2005 Last revised: 9 Jun 2011

Matthew R. McBrady

University of Virginia - Darden School of Business

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Michael J. Schill

University of Virginia ­ Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 10, 2007

Abstract

We find that firms alter the currency composition of their international bond issues to respond to differences in borrowing rates across currencies. For a broad sample of international corporate bonds denominated in six major currencies, we find strong and consistent evidence that firms respond to apparent departures from both covered and uncovered interest parity in their financing decisions. Emerging market and non-investment grade issuers are less likely to respond to differences in covered yields consistent with their limited access to currency swap markets. Overall, the gains that firms achieve are economically significant but consistent with well-functioning markets.

Keywords: Interest rate parity, international bonds, currency timing, opportunistic financing

JEL Classification: G32, F31

Suggested Citation

McBrady, Matthew R. and Mortal, Sandra and Schill, Michael J., Do Firms Believe in Interest Rate Parity? (October 10, 2007). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=672624 or http://dx.doi.org/10.2139/ssrn.672624

Matthew R. McBrady

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/mcbrady.htm

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Michael J. Schill (Contact Author)

University of Virginia ­ Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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