Foreign currency-denominated borrowing is arguably
one of the most central features of financial globalization.
After all, perhaps the most straightforward
definition of financial globalization is the simple ability
for borrowers and savers to transact across borders.
A great deal of research has historically focused on the
cross-border transactions of savers. Most studies conclude
that they appear to invest too little in foreign markets.
In fact, this well-known ‘home bias’ on the part of
investors has been one of the most enduring mysteries in
international finance over the past 20 years. By contrast,
much less work has been done on the cross-border transactions
of borrowers. Especially in light of the wellestablished
findings on home bias, this relative lack of
focus seems surprising. If investors invest too little
abroad, that means much of the real work of financial
globalization is left to be done by the issuers of the debt
and equity securities, which investors ultimately purchase
in their home markets.
Numerous studies show that cross-border issuance of
financial securities has, in fact, been growing at a rapid
pace (see, e.g., Henderson et al., 2006). There is also a
well-established literature on the decision by firms to
cross-list their equity securities summarized elsewhere
in this Handbook. On the other hand, there is relatively
little theoretical and empirical work on the decision by
firms in advanced economies to issue bonds outside
their home markets. This is particularly surprising given
that, as Henderson et al. note, international debt issues
are substantially more common than equity issues, accounting
for more than 90% of all international security
issues. This chapter provides a selective review of the
work that has been done on the subject, with a particular
focus on the relatively new research on opportunistic
debt issuance.
As described in greater detail below, opportunistic
issuance represents a rich field of inquiry located at the
intersection of historically disparate strands of research.
On the one hand, a firm’s currency denomination decision
represents a simple microlevel corporate financing
decision, resembling other potentially opportunistic
choices that firms make about when to raise capital
and what type of securities to issue. This literature, along
with previous empirical studies of foreign currencydenominated
debt (FC debt), is briefly reviewed in the
section ‘Related Literature’. On the other hand, however,
opportunistic FC debt issuance is also directly related to
the extensive macrofocused literature on interest rate
parity (IRP) and market integration. Obviously, if IRP always
held, there would be no cross-currency differences ploit. So, opportunistic FC debt issuance implies at the
very least that bond issuers do not believe that IRP holds.
More intriguingly, opportunistic issuers might also unwittingly
serve as the ‘one-way arbitrageurs’ that effectively
integrate global bond and swap markets in
equilibrium. This possibility and the related literature
on long-term IRP are discussed further in the section
‘Long-Term IRP’. The section ‘Opportunistic FC Debt
Issuance’ reviews the existing evidence on opportunistic
FC debt issuance. The section ‘Conclusion’ offers concluding
remarks and highlights potentially fertile areas
of future research.