Capital Structure and Financial Risk: Evidence from Foreign Debt Use in East Asia


  • George Allayannis,

  • Gregory W. Brown,

  • Leora F. Klapper

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    • University of Virginia, University of North Carolina at Chapel Hill, and the World Bank, respectively. We thank Warren Bailey, Arturo Bris, Stijn Claessens, Simeon Djankov, Jack Glen, Benny Goodman, John Graham, Bob Harris, David Haushalter, James Hodder, Bernadette Minton, S. Janakiraman, Ajay Patel, N. R. Prabhala, Kimberly Rodgers, Steve Slezak, Sheridan Titman, James Weston, Marc Zenner, and an anonymous referee for helpful comments. The paper has also benefited from seminar discussions at Cornell University, Rice University, Georgetown University, Pennsylvania State University, INSEAD, SMU, New York University, American University, University of Maastricht, The Darden School, The University of North Carolina at Chapel Hill, the 6th Georgia Tech International Finance Conference, the EFMA 2000 in Athens, the 11th Annual Financial Economics and Accounting Conference (Michigan), the 4th Annual Conference on Financial Market Development and Transition Economies in Santiago, Chile, and The World Bank. We are indebted to Craig Doidge and Paisan Limratanamongkol for providing excellent research assistance. The first author also wishes to thank the Darden School Foundation for summer support. The opinions expressed do not necessarily reflect those of the World Bank.


Using a data set of East Asian nonfinancial companies, we examine a firm's choice between local, foreign, and synthetic local currency (hedged foreign currency) debt. We find evidence of unique as well as common factors that determine each debt type's use, indicating the importance of examining debt at a disaggregated level. We exploit the Asian financial crisis as a natural experiment to investigate the role of debt type in firm performance. Surprisingly, we find that the use of synthetic local currency debt is associated with the biggest drop in market value, possibly due to currency derivative market illiquidity during the crisis.