Information Asymmetry and Foreign Currency Borrowing by Small Firms

M. Brown, S. Ongena, P. Yesin

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Abstract

We model the choice of loan currency in a framework which features a trade-off between lower cost of debt and the risk of firm-level distress costs. Under perfect information foreign currency funds come at a lower interest rate, all foreign currency earners as well as those local currency earners with high revenues and/or low distress costs choose foreign currency loans. When the banks have imperfect information on the currency and level of firm revenues, even more local earners switch to foreign currency loans, as they do not bear the full cost of the corresponding credit risk.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Volume2011-099
Publication statusPublished - 2011

Publication series

NameCentER Discussion Paper
Volume2011-099

Keywords

  • foreign currency borrowing
  • competition
  • banking sector
  • market structure

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    Brown, M., Ongena, S., & Yesin, P. (2011). Information Asymmetry and Foreign Currency Borrowing by Small Firms. (CentER Discussion Paper; Vol. 2011-099). Finance.