Do Firms Believe in Interest Rate Parity?
Matthew R. McBrady
University of Virginia - Darden School of Business
University of Memphis
Michael J. Schill
University of Virginia Darden School of Business
October 10, 2007
AFA 2006 Boston Meetings Paper
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.
Number of Pages in PDF File: 33
Keywords: Interest rate parity, international bonds, currency timing, opportunistic financing
JEL Classification: G32, F31
Date posted: February 24, 2005 ; Last revised: June 9, 2011