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

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.