Currency Choice of International Bonds: An Empirical Analysis of Bond, Firm, and Macroeconomic Factors

Abstract

Using a novel database of bonds issued by international firms listed in Compustat Global, I examine the firm-level, bond-level, and macroeconomic drivers of foreign currency bond issuance. While previous literature has focused on foreign denominated debt at the firm level, given the rising importance of bond debt relative to bank debt, I examine which of three major hypotheses—natural hedging, segmented markets, and depth of markets— best describe the currency choice of bonds. Mirroring previous firm-level studies, my results at the bond and company level indicate that all three hypotheses likely affect firms’ decisions. My results from segmenting my data into small versus large bond markets suggest that market depth remains an important driver for firms operating in countries with small domestic bond markets while segmented markets better describes bond issuance by firms operating in countries with deep domestic bond markets. When I segment my sample into small versus large firms, market depth appears to be a greater concern for small firms, in line with expectations that small or medium enterprises face greater financing constraints than large firms.