Corporate Dollar Debt and Depreciations: All's Well that Ends Well?

This paper explores the effect of currency depreciations on firms capital expenditures when firms hold stocks of foreign-currency denominated debt. The analysis is based on a newly built database of stocks of foreign-currency... [ view full abstract ]

This paper explores the effect of currency depreciations on firms capital expenditures when firms hold stocks of foreign-currency denominated debt. The analysis is based on a newly built database of stocks of foreign-currency bonds of seven thousands firms across fifteen emerging economies for the period 2000-2015. The results indicate significant negative effects of a currency depreciation, with the negative balance sheet effects of holding foreign-currency denominated debt offsetting any beneficial effect derived from the depreciation. A depreciation of 10% is associated with a ratio of capital expenditures to assets about 0.3 percentage points lower for firms with outstanding stocks of foreign-currency bonds. This negative balance sheet effect is robust to different inference techniques---including using the market's taper tantrum of 2013 as a natural experiment, and to controlling for a large number of potential confounders---including proxies for firm exposure to foreign markets and foreign ownership. The negative effects are found for contemporary capital expenditures, as well as for expenditures the year following the depreciation.