A Reexamination of Domestic Firm Value & Foreign Currency Borrowing in the Presence of Taxes

Abstract

The purpose of this paper is to examine the theoretical arguments presented in the literature related to the issue concerning whether domestic firm value may be enhanced via the use of foreign currency debt. Additionally, it adds to the existing literature in three ways. First, it provides an extension of the existing literature into a more general (and perhaps more realistic) setting. Second, a new international debt market equilibrium condition (termed the International Darby Effect) is derived, where all markets equilibrate on an after-tax real basis. And finally, the authors argue that in this new international setting firm value is independent of the currency denomination choice.