When shall a country have its own bond market?: Evidence from bond issuance before and after the launch of the EMU

摘要

We introduce a model where small firms from both euro-area and non-euro-area countries decide whether or not to issue in euro based on weighing the implications of the scale economies available in deeper foreign currency markets against the exposure to currency risk associated with not issuing in the domestic currency. Our model predicts that the increased market volume associated with the advent of the euro would result in a redirection of issues towards the euro and away from other currencies both within and outside the euro area. We confirm this prediction based on firm-level data for over 85,000 private bonds issued by 9000 firms from 22 countries in 1986-2007. The advent of the euro results in statistically and economically significant increases in the share of euro-denominated issues. These increases vary in size across country groups, but are robust to conditioning for a variety of individual issue characteristics. In particular, our model predicts that the advent of the euro will result in a substantial shift of issues in a representative outsider country away from domestic currency to euro, lowering the overall volume of issues in the country's domestic currency and increasing the potential for no local currency bond market to emerge in equilibrium. We confirm this shift empirically and parameterize the model using our empirical findings to determine how the size of the currency risk premium affects local currency bond issuance in a small country.