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Effects of foreign currency debt on leverage adjustments and investment decisions

Grant number: 22/15226-3
Support Opportunities:Scholarships in Brazil - Doctorate
Effective date (Start): April 01, 2023
Effective date (End): September 16, 2025
Field of knowledge:Applied Social Sciences - Administration - Business Administration
Principal Investigator:Rafael Felipe Schiozer
Grantee:Guilherme Freitas Cardoso
Host Institution: Escola de Administração de Empresas de São Paulo (EAESP). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
Associated scholarship(s):23/13155-4 - Effects of foreign currency debt on leverage adjustments and investment decisions, BE.EP.DR

Abstract

This research project aims at investigating how debt in foreign currency affects the speed of adjustment of capital structure in different jurisdictions. In addition, it aims at evaluating how institutional features of a firm's country of residence and foreign currency volatility moderate the effect of debt in foreign currency on the speed of adjustment. We use a cross-country panel sample of firms with more than 200,000 observations from 37 different countries (including both advanced and emerging economies) from 2002 to 2021. We extract data on foreign debt issued by firms from Capital IQ and match these with data from Compustat Global. Preliminary evidence shows that foreign currency borrowing substantially affects the endogenous decision to adjust leverage. Our baseline regression specifications capture this effect by interacting a firm's foreign currency borrowing measure with its deviation from target leverage. By showing that adjustments toward target leverage vary with the marginal cost of implementing leverage changes, we aim to provide empirical evidence consistent with the widely used partial adjustment model due to the exchange rate affecting leverage exogenously. Moreover, show evidence of the benefits and costs of borrowing in foreign currency in investment decisions.

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