Balance sheet and currency mismatch: evidence for Peruvian firms

Abstract

In the Peruvian economy, as in other emerging economies, a significant portion of the debt held by firms is denominated in US dollars. While an exchange rate depreciation is likely to increase firm debt and influence investment and production plans, the literature finds weak or no evidence of this balance sheet effect. In this paper, I argue that this effect is observed in firms with a significant currency mismatch. I estimate the currency mismatch (defined as assets minus liabilities in US dollars and expressed as a percentage of total assets in domestic currency) from which the exchange rate has negative effects on firms’ investment. Using financial information from 74 non-financial Peruvian firms from 2002 to 2014, I find significant balance sheet effects for firms with a currency mismatch below − 10.4%.