Firm Level Gains from Financial Integration

Many firms borrow predominantly in foreign currencies from foreign lenders. Access to these foreign lenders may have large impacts on firm borrowing costs and quantities. We propose a model of firm debt financing across debt markets which are segmented by currency. Firms face separate credit supply curves in each debt market. A key theoretical takeaway is that existing approaches to estimating cost of borrowing savings based on estimates of savings on the marginal unit of debt are only valid if firms face perfectly flat credit supply curves. We then measure key empirical quantities and estimate the parameters in our model using a comprehensive, security level dataset of global corporate debt issuance which covers firms in 41 countries. We find that credit supply curves are not perfectly flat and that there are meaningful inframarginal gains. We estimate that many firms reduce the interest rates on their debt liabilities by up to 2 percentage points by accessing foreign currency debt markets. We perform model counterfactuals in which we change barriers to financial integration.