Information Asymmetry and Foreign Currency Borrowing by Small Firms

M. Brown, S. Ongena, P. Yesin

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Information asymmetry
Borrowing
Small firms
Foreign currency
Loans
Currency
Costs
Revenue
Distress
Perfect information
Trade-offs
Interest rates
Imperfect information
Cost of debt
Credit risk

Keywords

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

Cite this

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

Information Asymmetry and Foreign Currency Borrowing by Small Firms. / Brown, M.; Ongena, S.; Yesin, P.

Tilburg : Finance, 2011. (CentER Discussion Paper; Vol. 2011-099).

Research output: Working paperDiscussion paperOther research output

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KW - foreign currency borrowing

KW - competition

KW - banking sector

KW - market structure

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VL - 2011-099

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Brown M, Ongena S, Yesin P. Information Asymmetry and Foreign Currency Borrowing by Small Firms. Tilburg: Finance. 2011. (CentER Discussion Paper).