## Exchange Rate Fluctuations and Firm Leverage

_IMF Working Papers, December 11, 2020_

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## Bibliographic details
- Authors: Ilhyock Shim, Sebnem Kalemli-Ozcan
- Published: December 11, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513560946.001

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### Summary
- We quantify the effect of exchange rate fluctuations on firm leverage.
- When home currency appreciates, firms who hold foreign currency debt and local currency assets observe higher net worth as appreciation lowers the value of their foreign currency debt; these firms can borrow more and increase their leverage.
- When home currency depreciates, the reverse happens: firms face negative balance-sheet shocks and must de-lever.
- Using firm-level data for leverage from 10 emerging market economies during the period from 2002 to 2015, the authors show that firms operating in countries whose non-financial sectors hold more of the debt in foreign currency increase (decrease) their leverage relatively more after home currency appreciations (depreciations).
- Combining the leverage data with firm-level FX debt data for 4 emerging market countries, the authors further show that results hold at the most granular level.
- The quantitative results are asymmetric: the effects of depreciations, that are generally associated with sudden stops, are quantitatively larger than those of appreciations, which take place at a slower pace over time during capital inflow episodes.
- As the exercise compares depreciations and appreciations of similar size, results are suggestive of financial frictions being more binding during depreciations than a possible relaxation of such frictions during appreciations.

### Key Findings and Evidence
- Data scope:
  - Firm-level leverage data from 10 emerging market economies.
  - Sample period: 2002 to 2015.
  - Additional firm-level FX debt data for 4 emerging market countries to confirm granular-level effects.
- Main empirical regularities:
  - Home currency appreciation → lower value of firms' foreign currency debt → higher net worth → increased borrowing → higher leverage.
  - Home currency depreciation → higher burden of foreign currency debt → negative net worth shock → de-leveraging.
  - Countries with larger shares of non-financial sector debt denominated in foreign currency exhibit stronger leverage responses to exchange rate movements.
- Asymmetry:
  - Depreciation effects > Appreciation effects for comparable-sized currency moves.
  - Depreciations often coincide with sudden stops; appreciations tend to occur more gradually during capital inflows.
  - Suggests financial frictions tighten more during depreciations than they loosen during appreciations.

### Research Context and Keywords
- Subject: Currencies, Depreciation, Exchange rate adjustments, Exchange rates, Foreign exchange
- Keywords: Capital Flows, COVID-19, debt share, Exchange Rates, Firm Leverage, FX bond, FX Borrowing, FX debt, FX loan, government FX, WP

_Exchange Rate Fluctuations and Firm Leverage — Ilhyock Shim and Sebnem Kalemli-Ozcan, IMF Working Papers 2020, 283 (2020)._

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_Source: https://www.imf.org/en/publications/wp/issues/2020/12/11/exchange-rate-fluctuations-and-firm-leverage-49881_