Foreign currency debt financing and firm profitability: Evidence from an emerging market

Abstract

 This study examines how foreign currency debt financing influences the profitability of 684 publicly listed firms on the Vietnamese stock exchange over ten years, from 2011 to 2020. Data on foreign debt is manually extracted from annual reports. Panel data models are utilized for estimation, and the two-stage least squares method is applied to address potential endogeneity issues. The findings indicate that foreign currency debt is negatively correlated with firm profitability. These results remain robust across various firm profitability proxies and estimation methods. The study period is further divided into sub-time ranges based on the introduction of Circular 42/2018, which was enacted to limit the categories of firms eligible to obtain foreign currency debt. The findings show that foreign currency debt is negatively correlated with firm profitability only before the implementation of Circular 42/2018, while no significant correlation is observed in the period following its enactment. The study shows that increasing the use of foreign currency debt will reduce the profitability of the firm. This result suggests that financial managers need to pay attention to financing decisions, specifically considering reducing the level of foreign currency debt to ensure the efficiency of debt use.