Firm-Level Gains from Financial Integration
Draft coming soon
Abstract
Corporate debt issuance to foreign lenders occurs primarily in foreign currencies, with potentially large impacts on firm borrowing costs and quantities. We propose a general model of firm debt financing across debt markets segmented by currency, and derive a sufficient statistic for the savings on cost of capital that firms realize by accessing foreign lenders. A key theoretical result is that marginal-unit based estimates of cost of borrowing savings are only valid when credit supply curves are perfectly flat. Using a comprehensive, security-level dataset of global corporate debt issuance covering firms in 41 countries, we estimate the model's parameters and find that credit supply curves are not perfectly flat, generating meaningful inframarginal gains. Many firms reduce the interest rates on their debt liabilities by up to 2 percentage points by accessing foreign currency debt markets. We build a quantitative extension of the model to estimate fixed costs that shape extensive margin issuance decisions, and use it to run counterfactuals that highlight the importance of a firm's home currency for its debt financing decisions.
