Using a broad sample of international corporate bond offerings, we provide evidence that corporate borrowers make opportunistic currency choices, in that they denominate the currency of their bonds in a manner that is inconsistent with a belief in either covered or uncovered interest rate parity. Using firm-level tests, we identify a number of characteristics of firms that engage in opportunistic behavior. We observe that large issuers located in developed markets with investment-grade ratings and low cash flow characterize those firms that are responsive to covered borrowing rate differences across currencies. Corporate responsiveness to uncovered borrowing rate differences appears more general. We observe that although the gains firms achieve through opportunistic currency denomination are economically significant, the yield differential tends to systematically decline after issuance. This finding suggests that opportunistic issuance by corporations may be a primary mechanism for driving covered interest yields toward parity.

We test the limits of arbitrage argument for the survival of irrationality-induced financial anomalies by sorting securities on their individual residual variability as a proxy for idiosyncratic risk – a commonly asserted limit to arbitrage – and comparing the strength of anomalous returns in low versus high residual variability portfolios. We find no support for the limits of arbitrage argument to explain undervaluation anomalies (small value stocks, value stocks generally, recent winners, and positive earnings surprises) but strong support for the limits of arbitrage argument to explain overvaluation anomalies (small growth stocks, growth stocks generally, recent losers, and negative earnings surprises). Other tests also fail to support the limits of arbitrage argument for the survival of overvaluation anomalies and suggest that at least some of the factor premiums for size, book-to-market, and momentum are unrelated to irrationality protected by limits to arbitrage.