The Boom of Corporate Debt in Latin America : Carry Trade or Investment?

Previous research shows that due to a decline in international yields following the recent global crises corporations in emerging markets are issuing more debt in the international markets (offshore debt). Some evidence suggests that lower international rates encourage firms to abnormally accumulate cash holdings as a means to increase carry trade activities rather than to accumulate precautionary savings. Using a sample of nonfinancial listed firms for six Latin American countries, we analyze the relation between aggregated offshore debt, cash holdings, and investment. We find evidence in line with prior research that companies accumulate more cash when carry trade is more favorable. However, we also find that this cash holding anomaly is consistent with the precautionary savings argument. Offshore debt impacts next-period investment significantly. This result is robust and heterogeneous. We include other country-specific variables and check the robustness of our findings, and the main results hold