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

IMF Working Papers, October 1, 1999

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

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Bibliographic details

• Authors: Se-Jik Kim, Mark R. Stone
• Published: October 1, 1999
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451856323.001

Summary and scope

• Title: Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia
• Authors: Se-Jik Kim, Mark R. Stone
• Publication type: IMF Working Papers, Working Paper No. 1999/143
• Publication date: October 1, 1999
• Pages: 29
• Volume: 1999
• Issue: 143
• DOI: https://doi.org/10.5089/9781451856323.001
• Stock No: WPIEA1431999
• ISBN: 9781451856323
• ISSN: 1018-5941
• Subject tags: 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

Model framework and mechanism

• The paper develops a model using different levels of corporate leverage to explain variation in post-crisis output adjustment across East Asia.
• Mechanism described:
  • 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.
  • Shrinking aggregate capital stock triggers deflationary pressures.
  • Deflationary pressures and reduced capital lead to contraction of overall output.

Empirical alignment

• The available data are broadly consistent with the assumptions and predictions of the model.

Key implications and focus areas

• Corporate leverage and exposure to capital inflow cutoffs are central to post-crisis output dynamics in East Asia.
• Fire sales of capital goods and cessation of investment by distressed, highly leveraged firms are primary channels for aggregate capital stock reduction.
• Resulting deflationary pressures constitute an amplification channel from firm-level distress to macroeconomic output contraction.

Publication and access notes

• Format listed: Chicago citation provided for the Working Paper.
• Download options referenced: Download PDF, More Formats on IMF eLibrary, Order a Print Copy, Create Citation (formatting and export options noted).
• Disclaimer present in the original: "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."

Source: IMF Working Paper "Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia" by Se-Jik Kim and Mark R. Stone (October 1, 1999), Working Paper No. 1999/143.

Content in this bundle

• Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia - WP/99/143
  • Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia - WP/99/143 (Markdown version)
  • Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia - WP/99/143 (PDF)