Essays in international corporate finance
This dissertation comprises two essays that study the link between corporate exposure to international markets, liquidity management and hedging through debt in foreign currency. Chapter 1: Currency Exposure and Liquidity Management. Exchange rate movements present many risks for globalized companies, such as unexpected liquidity shortfalls that reduce their ability to undertake profitable investments. How does currency risk affect the liquidity policy of highly globalized firms? In this chapter, I present and test the hypothesis that globalized firms with high currency exposure hold more cash relative to credit lines as a precaution to these adversities. I show that high currency risk increases the cost of credit lines for U.S. firms, and strengthens the relative use of cash as the main liquidity provider. This result is robust to several measurements of currency exposure. Moreover, in times of high volatility on currency markets, reliance on cash increases for highly-exposed firms, but not for less-exposed ones. These results link the literatures of liquidity management and corporate policy under currency risk. Chapter 2: Cash Retentions from Debt in Foreign Currency: A Hedging Instrument. Companies that issue debt in foreign currency (DFC) and convert the proceedings back to their original currency create a hedging instrument that offsets volatility on foreign income. In this chapter, I evaluate if American multinationals and exporters use this hedging mechanism by holding more cash from their DFC issuances as compared to their U.S. dollar-denominated debt issuances. I find evidence that multinationals and exporters indeed use this mechanism. I show that for every monetary unit raised in foreign currency debt, these companies retain 3.49x more cash than they do for regular U.S. dollar debt issuances. Exploiting firms' heterogeneity to investigate potential characteristics that intensify this channel, I find that cash retention is more pronounced for companies that have no alternative hedging instruments (e.g. derivatives or lines of credit), and for debt issuances on floating currencies, as opposed to currencies from countries with managed exchange rate regimes.
Currency risk, Liquidity management, Debt in foreign currency, Hedging
University of Illinois - Urbana-Champaign
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University of Illinois at Urbana-Champaign