Foreign versus domestic currency debt financing

The issue concerning the use of foreign versus domestic currency denominated debt in a firm's capital stmcture is unresolved. Specifically, there exist in the literature conflicting conclusions regarding whether a domestic firm may enhance its value by using foreign currency debt, rather than domestic currency debt. Further, no attempt has yet been made to empirically evaluate the problem.

The question is first addressed in a no tax environment where Senbet [1979]concludes that foreign currency debt offers no advantage relative to domestic currency debt, assuming Interest Rate Parity (IRP) and Relative Purchasing Power Paritv (RPPP) hold. Next, taxes are introduced into the analysis. Here, Lee and Zechner [1984] conclude that a domestic firm may enhance its value by issuing foreign currency debt, even when IRP and RPPP hold. Contrary to this conclusion, Hodder and Senbet [1990] argue that the presence of intemational tax arbitrage by multinational firms will render the currency of denomination decision irrelevant.