Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia

Author/Editor:

Se-Jik Kim ; Mark R. Stone

Publication Date:

October 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Different levels of corporate leverage are used in this paper to help explain the wide range of post-crisis output adjustment across East Asia. In the model developed here, highly leveraged firms facing a cutoff of capital inflows are threatened by bankruptcy. These firms respond by eliminating investment and selling their capital goods-at a discount-to try to stay afloat. Lower investment and wasteful capital sales shrink the aggregate capital stock, trigger deflationary pressures, and contract overall output. The available data are broadly consistent with the assumptions and predictions of the model.

Series:

Working Paper No. 99/143

Subject:

English

Publication Date:

October 1, 1999

ISBN/ISSN:

9781451856323/1018-5941

Stock No:

WPIEA1431999

Format:

Paper

Pages:

29

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