Foreign currency exposure and balance sheet effects: A firm-level analysis for Korea |
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| Institution: | 1. Lund University and Centre for Financial Econometrics Deakin University, Australia;2. Centre for Financial Econometrics Deakin University, Australia;1. McIntire School of Commerce, University of Virginia, VA, USA;2. College of Economics, Sungkyunkwan University, Seoul, Republic of Korea;3. Business School, Korea University, Seoul, Republic of Korea;4. Business School, Sungkyunkwan University, Seoul, Republic of Korea;1. Centre for Financial Econometrics, Deakin Business School, Deakin University, Australia;2. Department of Liberal Arts, Indian Institute of Technology Hyderabad, India |
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| Abstract: | If firms match the currency composition of their liabilities with that of their assets or income, a currency depreciation will have an ambiguous effect on investment of firms holding foreign debt. Using Korean firm-level data, we first find evidence of currency matching. We then show that foreign debt has a significant negative balance sheet effect on firm investment following a depreciation, once foreign assets and exports are controlled for. The balance sheet effect is particularly severe for firms subject to financial constraints. The inclusion of foreign assets is important for identifying the balance sheet effect separately from the competitiveness effect. |
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