CAPITAL STRUCTURE AND FINANCIAL RISK : EVIDENCE FROM FOREIGN DEBT USE IN EAST ASIA

Abstract

Using a data set of East Asian non¢nancial companies, we examine a ¢rm’s choice between local, foreign, and synthetic local currency (hedged foreign currency) debt.We ¢nd evidence of unique as well as common factors that de-termine each debt type’s use, indicating the importance of examining debt at a disaggregated level.We exploit the Asian ¢nancial crisis as a natural experi-ment to investigate the role of debt type in ¢rm performance. Surprisingly, we ¢nd that the use of synthetic local currency debt is associatedwith the biggest drop in market value, possibly due to currency derivative market illiquidity during the crisis. CAPITAL MARKETS, BOTH DEBTANDEQUITY, are becoming more global. For example, in 2000, 434 foreign companies from 51 di¡erent countries had listed shares on the NewYork Stock Exchange.This compares to only 60 foreign listings from a dozen countries in 1990. Recent research has examined the issuance of foreign equity and cross-listing by non-U.S. corporations (see Foerster and Karolyi (1999), Mill-

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