Foreign Currency Debt and Disagreement

Abstract This paper highlights the disagreement channel of corporate foreign currency borrowing. In our model, if domestic agents have better information than foreign lenders on the state of the economy, foreign currency borrowing might arise if the fundamentals are strong relative to what public signals suggest to foreigners. In these situations, international markets overestimate future currency depreciation, which increases the cost of borrowing in domestic currency. Domestic agents then borrow more in foreign currency because they disagree with international lenders’ pessimistic assessment. This mechanism is consistent with the data: empirically, we show that, controlling for fundamentals, negative public signals are associated with positive domestic currency excess returns and with more foreign currency borrowing.