Endogenous corporate leverage response to a safer macro environment: The case of foreign exchange reserve accumulation

A country may adopt policy measures such as raising its foreign exchange reserves to better prepare for sudden reversal of international capital flows or currency attacks, which in principle should reduce financial vulnerability firms and the entire economy, but beneficial effect policies be partially offset by endogenous firms' decisions take on more risks. We present a robust previously undocumented relationship between corporate leverage country-level reserve holdings. For 6610 non-financial 23 emerging markets from 2000 2006, we show that accumulation leads higher leverage. The is significantly greater sectors are intrinsically sensitive uncertainty. go correlation causality via two-prong instrumental variable strategy: simultaneously (1) instrumenting FX global commodity price movement, (2) examining outside commodity-sensitive sectors.