Evaluating the Impact of Post-crisis Growth in Emerging Market Corporate Debt
51 Pages Posted: 25 Jan 2018 Last revised: 23 Apr 2019
Date Written: April 17, 2019
In this paper, we investigate how increased corporate leverage among emerging market firms in the post-crisis period (2010-2015) had an impact on underlying credit risk. Using firm-level credit risk, financial, and balance sheet data from 350 firms in 23 emerging markets over an extended period (2002-2015), we show that (a) an increase in post-crisis period leverage significantly increases corporate credit default swap (CDS) spreads, and (b) the incremental effect of leverage growth on CDS spreads is not significantly different between the crisis (2007-09) and post-crisis periods. Both findings are robust to a battery of tests and imply potential firm-level corporate vulnerability due to increased corporate debt in emerging markets. There is considerable heterogeneity in the impact on CDS spreads at regional, industry, and firm levels. The effect of post-crisis leverage growth on credit risk is significantly lower for high growth prospect firms, and for those domiciled in countries with high net capital inflows and superior governance. Finally, while the increase in post-crisis corporate leverage is found to impact aggregate corporate vulnerability, there is no evidence that it increases sovereign credit risk in the emerging markets.
Keywords: emerging markets, corporate debt, distress risk, post-financial crisis
JEL Classification: G10, G14 G15, G30
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