Currency Depreciation and Emerging Market Corporate Distress

Abstract

How do emerging market corporates fare during periods of currency depreciation? We find that nonfinancial firms that exploit favorable global financing conditions to issue U.S. dollar bonds and build cash balances are also those whose share price is most vulnerable to local currency depreciation. In particular, firms’ vulnerability to currency depreciation derives less from the foreign currency debt as such, and more from the cash balances that are built up by using foreign currency debt. Overall, our results point to a financial motive for dollar bond issuance by emerging market firms in carry trade–like transactions that leave them vulnerable in an environment of dollar strength. This paper was accepted by Gustavo Manso, finance.