This type of one-way arbitrage activity in response to
cross-currency differences in borrowing costs is certainly
consistent with what firms claim to do. Graham and
Harvey (2001), for example, find that 44% of the firms
in their survey cite lower borrowing costs as an important
reason for issuing FC debt. Similarly, Servaes and
Tufano (2006) observe that ‘relative interest rates,’ ‘relative
credit spreads,’ and ‘expected exchange rate movements’
are among the most common reasons that firms
cite in their study for issuing debt in a foreign currency.
Likewise, Geczy et al. (2007) find that 42% of the firms in
their survey at least sometimes take positions in response
to a market view on future exchange rate or interest
rate movements.
While this type of anecdotal evidence is abundant,
there are relatively few empirical analyses that investigate
whether or not these types of claims are consistent
with what bond issuers actually do. Johnson (1988), for
example, finds that the mix of Canadian dollar- and US
dollar-denominated bonds is correlated with differences
in nominal interest rates in the two currencies and proxies
for expected depreciation. Similarly, in their analysis
of the borrowing behavior of East Asian firms before the
Asian Financial Crisis, Allayannis et al. (2003) find that
firms are more likely to issue FC debt when local shortterm
interest rates are relatively high. In a more comprehensive
analysis, Henderson et al. (2006) investigate FC
debt issues into the US (i.e., Yankee) and UK (i.e., Bulldog)
bond markets for a sample of G-7 issuers. They
find that firms issue a relatively larger amount of debt
in each market when 10-year interest rates in the local
market are low both in an absolute sense and relative
to the rates that prevail in the issuer’s home currency.