The Asian Bet
Andrew H. Roper
University of Wisconsin, Madison - Department of Finance, Investment and Banking
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
The World Bank and Brookings Institute
Local Asian and international capital markets have been branded as culprits in the recent Asian financial crisis. Unfortunately, much of our understanding of the crisis stems from macro level analysis. We provide a micro level approach to understanding the Asian financial crisis that focuses on understanding the development of capital markets throughout the region as well as deciphering the performance of Asian corporations. We find that Asian capital markets were successful at fostering new capital mobilization as well as offering a high degree of liquidity to investors. Asian capital markets also pursued gradual liberalization and privatization programs during the 1990s. Despite these successes, Asian equity markets were characterized by a high degree of asset and industry based concentration. Both forms of concentration help to explain the high correlation among individual stock returns in Asia. Stock market investment performance in Asian failed to achieve returns comparable to less risky investments made in the US and the rest of the world. The only exception to this poor investment performance resulted from dynamic trading strategies designed to capture the price appreciation associated with capital market integration. We argue that corporate managers bet their companies by taking greatly increased leverage in the face of declining profitability. In addition, much of the debt was foreign denominated. This added an extra dimension to the gamble. Asian managers were betting that the exchange rate would remain stable. We argue that the crisis was heightened by the extra risk exposure that Asian managers induced by their leverage policies. This all points to a failure in corporate governance with respect to risk management and control.
Number of Pages in PDF File: 68
JEL Classification: F3, G1, G3Accepted Paper Series
Date posted: September 23, 1999
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