Exchange Rate Regime and Financing Policies of the Corporate Sector in Small Open Economies.

This dissertation studies the relationship between exchange rate regimes and financing decisions of corporations in small open economies with access to international capital markets. The first essay develops a model of the choice between local and foreign currency debt by capital-constrained firms facing exchange rate risk and hedging possibilities. The model shows that the currency composition of debt and the level of hedging are both endogenously determined as optimal firms' responses to a tradeoff between the lower cost of borrowing in foreign currency and the higher risk involved due to exchange rate uncertainty. The model explains why, unlike predictions of the previous work in the literature of currency crisis, the collapse of the fixed exchange rate regime in Brazil in early 1999 did not cause a major change in the currency composition of debt of the corporate sector. The second essay studies the effect of hedging with foreign currency derivatives on Brazilian firms in the period 1997 through 2004, a period that includes the Brazilian currency crisis in 1999. The paper finds that compared to non-user firms, derivative users have valuations that are 7-10% higher. Hedging with currency derivatives has three noticeable effects on firms: (i) it increases foreign debt capacity, so that there is a substitution from domestic debt to foreign debt, which is cheaper (ii) it removes the sensitivity of capital expenditures to Earnings Before Interest and Taxes (EBIT), and (III) it results in higher net income, for a given level of leverage and EBIT. It is argued that access to foreign debt represents a primary friction over the sample period, which makes hedging valuable. The third essay presents a case study to analyze hedging strategies implemented in practice by companies in Brazil. Two large companies, both operating in international markets and using financial hedging are chosen to illustrate how corporations deal with exchange rate risk. Consistent with corporate hedging theory, the case study finds that hedging contributes to smooth companies' earning and helps mitigate the depletion of shareholder's equity. In turn, this contributes to reduce investor's risk perception about the firm and increases its foreign debt capacity.Ph.D.EconomicsUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/57679/2/jberros_1.pd

The Effects of Bank Capital on Lending: What Do We Know, and What Does It Mean?

The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel regression techniques—following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)—to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan’s (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial bank assets and leverage growth, which have recently been very influential in shaping forecasters’ and policymakers’ views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.

The effects of bank capital on lending: what do we know, and what does it mean?

The effect of bank capital on lending is a critical determinant of the linkage between financial conditions and real activity, and has received especial attention in the recent financial crisis. We use panel-regression techniques--following Bernanke and Lown (1991) and Hancock and Wilcox (1993, 1994)--to study the lending of large bank holding companies (BHCs) and find small effects of capital on lending. We then consider the effect of capital ratios on lending using a variant of Lown and Morgan's (2006) VAR model, and again find modest effects of bank capital ratio changes on lending. These results are in marked contrast to estimates obtained using simple empirical relations between aggregate commercial-bank assets and leverage growth, which have recently been very influential in shaping forecasters' and policymakers' views regarding the effects of bank capital on loan growth. Our estimated models are then used to understand recent developments in bank lending and, in particular, to consider the role of TARP-related capital injections in affecting these developments.Bank capital ; Bank loans

Corporate hedging, investment and value

We consider the effect of hedging with foreign currency derivatives on Brazilian firms in the period 1997 through 2004, a period that includes the Brazilian currency crisis of 1999. We find that, derivative users have valuations that are 6.7-7.8% higher than non-user firms. Hedging with currency derivatives allows firms to sustain larger capital investments, and also removes the sensitivity of investment to internally generated funds. Thus, it mitigates the underinvestment friction of Froot, Scharfstein, and Stein (1993), at a time when capital in the economy as a whole is scarce. We further show that hedging increases the foreign currency debt capacity of a firm, and that foreign debt is a cheaper source of capital than domestic debt during our period of study.Hedging (Finance) ; Corporations - Finance