Finance Papers

Document Type

Journal Article

Date of this Version

2002

Publication Source

Journal of Financial Economics

Volume

63

Issue

2

Start Page

275

Last Page

310

DOI

10.1016/S0304-405X(01)00097-6

Abstract

Currency crises can arise because it is optimal to bail out financially distressed exporting firms through a currency depreciation. Exporting firms will not undertake profitable investments when high leverage causes debt overhang problems. A currency depreciation increases the profitability of new investments when revenues are foreign-currency denominated and domestic-currency costs are nominally rigid. Ex ante, currency depreciation leads to excessive investment in risky projects even if safer, more valuable projects are available. However, currency depreciation is optimal ex ante if the risky projects have higher expected returns and if firms must rely on debt financing because of underdeveloped equity markets.

Copyright/Permission Statement

© 2002. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.

Comments

At the time of publication, author Yrjo Koskinen was affiliated with the Stockholm School of Economics, Stockholm, Sweden. Currently, he is a faculty member at the Wharton School at the University of Pennsylvania.

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Date Posted: 27 November 2017

This document has been peer reviewed.