Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia
October 1, 1999
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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.
Subject: Asset and liability management, Balance of payments, Bonds, Capital inflows, Credit, Financial institutions, Liquidity, Money, Stocks
Keywords: Asia and Pacific, bankruptcy, Bonds, Capital inflows, capital sale, capital sales, capital stock, corporate leverage, Credit, debt firm, East Asia, east Asian crisis, Liquidity, liquidity constraint, liquidity shock, output contraction, output contractions, Stocks, WP
Pages:
29
Volume:
1999
DOI:
Issue:
143
Series:
Working Paper No. 1999/143
Stock No:
WPIEA1431999
ISBN:
9781451856323
ISSN:
1018-5941
