US Dollar denominated bond issuers and the effects of the increase in federal interest rates: evidence from emerging market companies

We use the increase on federal interest rates that started in the end of 2015 to study the effect of externalinterest rates changes on emerging market companies. We use the outstanding US Dollar denominated debt of companies as an identification strategy to determine the companies that were more susceptible to changes on US interest rates. To do this a Difference-in-Differenceanalysis, an event study methodology, and a matching estimator approach were used. The findings of this research indicate that companies in emerging markets reduce investment spending after the increase of federal interest rates. This reduction is stronger for companies with US Dollardenominated debt, that significantly decreased investment spending around 4percent more than the othercompanies.We also analyzed the impact that thesechanges had on the short and long run performance of companies. We concluded that in the short run,performance (measured by stock returns)of companies with outstanding US Dollar denominated debt, decreasedbetween 0.5 and almost 2 percent after the announcements of the interest rate increases.This result is significant around one of the two events conducted. We were unable to conclude on the effects of federal interest rate increaseson long run performanceof companies (measured as accounting profitability). This research shedslight on the consequences that increasing the interest rates in a strong economy have in companies of emerging market economies. Even though these economies have been growing fast in the past years, these are also vulnerable to external changes, and it is important to keep this effectunder consideration when changing monetary policy in advanced economies due to spillover effects and negative consequenceson EMEs.