Corporate Dollar Debt and Global Trades: The Role of Firm Heterogeneity

Abstract

This paper investigates the role of dollar debt and firm heterogeneity in shaping the exchange rate pass-through to global trades. We employ a unique dataset that combines detailed firm-level balance sheet information with transaction-level Korean customs data. Our findings reveal that after the 1997 devaluation, small exporters with higher levels of foreign currency debt tend to reduce their export quantities and raise their prices. In contrast, for large exporters, higher foreign currency debt results in higher export quantities and lower prices. The heterogeneous price and quantity responses across firm size may stem from financial frictions that smaller firms face, unlike large firms. Small firms burdened by foreign currency debt face tighter financial constraints, which limit their production. Large firms, however, may experience less disruption in their production even when highly exposed to foreign currency debt. Consequently, they could increase their exports to generate more cashflows, even if it means sacrificing future cash flows, particularly when they require liquidity due to high levels of foreign currency debt. The panel data analysis from 2001-2020 confirms the relevance of the financial channel of dollar debt in the exchange rate pass-through to export prices and quantities in more recent periods.