Lessons Unlearned? Corporate Debt in Emerging Markets

41 Pages Posted: 10 May 2017

See all articles by Laura Alfaro

Laura Alfaro

Harvard University

Gonzalo Asis

University of North Carolina (UNC) at Chapel Hill - Department of Economics

Anusha Chari

University of North Carolina (UNC) at Chapel Hill - Department of Economics; National Bureau of Economic Research (NBER); University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School; Centre for Economic Policy Research (CEPR)

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Multiple version iconThere are 3 versions of this paper

Date Written: May 8, 2017

Abstract

This paper documents a set of stylized facts about leverage and financial fragility in the non-financial corporate sector in emerging markets since the Global Financial Crisis (GFC). Corporate debt vulnerability indicators prior to the Asian Financial Crisis (AFC) attributed to corporate financial roots provide a benchmark for comparison. The firm-level data suggest that emerging markets post-GFC have lower leverage ratios than the five Asian crisis countries (Asian Five) in the run-up to the AFC. However, a broader set of emerging market countries show weaker liquidity, solvency, and profitability indicators. More countries are also in the Altman Z-score's “grey zone”, that is, at risk for corporate distress. Regression estimates confirm that leading up to the AFC and in the aftermath of the GFC, firms with higher leverage have Z-scores that are closer to the financial distress range. The data also corroborate two macro-related hypotheses: first, that leverage interacted with currency depreciation had a statistically significant adverse impact on Z-scores in pre-AFC; and second, that in countries with higher GDP growth leverage is correlated with less corporate financial fragility. Consistent with Gabaix (2011) the paper finds a granularity effect in that large firms are systemically important — idiosyncratic shocks to large firms significantly correlate with GDP growth in our emerging markets sample. Also, the more-levered large firms are more vulnerable to exchange rate shocks than smaller firms with comparable levels of leverage. While this result holds for the average country in our sample, there is substantial cross-country heterogeneity.

Keywords: Emerging Markets, Corporate Debt, Financial Fragility, Firm-Level Data, Large Firms

JEL Classification: F34, G01, G15, G32

Suggested Citation

Alfaro, Laura and Asis, Gonzalo and Chari, Anusha and Panizza, Ugo, Lessons Unlearned? Corporate Debt in Emerging Markets (May 8, 2017). Available at SSRN: https://ssrn.com/abstract=2964958 or http://dx.doi.org/10.2139/ssrn.2964958

Laura Alfaro

Harvard University ( email )

Cambridge, MA 02138
United States

Gonzalo Asis

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

Anusha Chari (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Chapel Hill, NC 27599
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

McColl Building
Chapel Hill, NC 27599-3490
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR

London
United Kingdom

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