We investigate the determinants of firms’ usage of foreign currency (FC) debt financing, relative to local currency (LC) debt financing. Employing extensive data of Korean firms during 2002-2012, we find that the firm-level determinants of FC and LC debt financing differ and vary by the period of appreciation or depreciation of LC value. Among others, consistent with the findings in the literature, a firm’s export ratio is significantly related to the usage of FC debt, evidence supporting for the hedging role of FC debt. Undocumented in the literature, however, we provide new evidence on the separation of firms favoring FC debt and firms favoring LC debt. While LC debt financing is affected mainly by demand-side borrower incentives such as operating profitability, R&D expense, financing deficit, and depreciation expense that reflect borrower’s capital needs, FC debt financing is affected mostly by supply-side lender incentives such as tangible asset ratio, firm size, and asset growth, which foreign lenders weigh heavily to assess the potential value of collateral, as well as export ratio. Our results remain robust to different model and time specifications.
JEL Classification: F31; G15
Key words: Foreign currency debt financing; Determinants; Borrower incentives; Lender incentives; Korean firms; Global financial crisis
