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Information asymmetry and foreign currency borrowing by small firms


Brown, Martin; Ongena, Steven; Yeşin, Pinar (2014). Information asymmetry and foreign currency borrowing by small firms. Comparative Economic Studies, 56:110-131.

Abstract

We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.

Abstract

We model how an information asymmetry between the lending bank and the applying firm about the currency structure of firm revenues may affect loan currency choice. Our framework features a trade-off between the lower cost of foreign currency debt and the costs of currency induced loan default. We show that under imperfect information about firm revenues more local earners choose foreign currency loans, as they do not bear the full cost of the corresponding credit risk. This result is consistent with recent evidence showing that information asymmetries may increase foreign currency borrowing by retail clients in the transition economies.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:1 February 2014
Deposited On:18 Feb 2014 14:32
Last Modified:05 Apr 2016 17:39
Publisher:Palgrave Macmillan
ISSN:0888-7233
Publisher DOI:https://doi.org/10.1057/ces.2013.9
Related URLs:http://www.merlin.uzh.ch/publication/show/8440
Other Identification Number:merlin-id:8440

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