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

October 1, 1999

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Se-Jik Kim, and Mark R. Stone Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia, (USA: International Monetary Fund, 1999) accessed September 26, 2024

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.

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

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/143
Stock No:

WPIEA1431999
ISBN:

9781451856323
ISSN:

1018-5941

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