Corporate foreign currency debt in Brazil: will dollar indebted firms invest more after real exchange rate depreciations?

• Published in: Applied economics letters Vol. 16; no. 11; pp. 1083 - 1088
• Main Author: Paz, Lourenco Senne
• Format: Journal Article
• Language: English
• Published: Taylor & Francis 01-07-2009; Taylor and Francis Journals
• Series: Applied Economics Letters
• Subjects: Brazil; Corporate debt; Corporate finance; Debt management; Dollar
• ISSN: 1350-4851; 1466-4291
• DOI: 10.1080/13504850701335335

In this article the effect of real exchange rate movements over the investment of Brazilian firms with foreign currency debt is assessed. Moreover, the hypothesis of currency matching between firm s revenues and expenditures will be tested. To do so, a new theoretical model is provided. Contrary to previous results of a positive effect of exchange rate devaluations over investment, our results show that the effect is decreasing on the share of the foreign currency liabilities. For small shares of foreign debt, the effect is positive, but by increasing the share it turns negative. We didn t find evidence of currency matching in our data.