We examine the valuation effect of foreign currency (FC) debt financing, relative to local currency (LC) debt financing. Employing extensive data of Korean firms during 2002-2012, we document strong evidence that firms using FC debt financing have significantly lower values than firms using LC debt financing. Even during the pre-global financial crisis period when the LC value appreciated, we find no evidence of an increase in firm value associated with FC debt financing. Further analyses on the possible causes of the negative association of FC debt and firm value reject the conjecture of higher firm risk resulting from the usage of FC debt but lend empirical support for the excessive cost of hedging. While the frequent and heavy usages of currency derivatives by Korean firms with FC debt financing lead to lower firm risk, such usages fail to generate higher firm values at least in part due to their excessive costs of hedging with currency derivatives. Our empirical results remain robust to different model and sample specifications.
JEL Classification: F31; G15
Key words: Foreign currency debt financing; Local currency debt financing; Firm value; Firm risk; Korean firms; Global financial crisis
