Evaluating Corporate Credit Risks in Emerging Markets

52 Pages Posted: 25 Jan 2018 Last revised: 23 Nov 2020

See all articles by Olga Dodd

Olga Dodd

Auckland University of Technology

Madhu Kalimipalli

Lazaridis School of Business and Economics, Wilfrid Laurier University

Wing H. Chan

Wilfrid Laurier University - School of Business & Economics; City University of Hong Kong (CityUHK) - Department of Economics & Finance

Date Written: October 1, 2020

Abstract

Corporate leverage among emerging market firms went up considerably after the 2007–09 Global Financial Crisis (GFC). We investigate how the increased emerging market corporate leverage in the post-GFC period (2010–15)impacted the underlying credit risk, compared to the pre-GFC (2002–2006) and GFC (2007–09) periods. Using firm-level credit risk, financial, and balance sheet data for 350 firms in 23 emerging markets, we find that leverage growth leads to a significant increase in corporate credit default swap (CDS) spreads only in the postGFC period, and the incremental effect is mainly evident among risky firms (firms with high leverage and idiosyncratic volatility). In contrast, emerging market CDS spreads during the GFC period are mainly driven by global market risk factors. The post-GFC corporate debt vulnerability is mitigated for high growth prospect firms and firms domiciled in countries with high net capital inflows and superior governance. While corporate leverage growth impacts aggregate corporate credit risk, there is no evidence that it increases sovereign credit risk. Our paper contributes to the recent literature on potential sources of default risk in emerging markets.

Keywords: emerging markets, corporate leverage, credit risk, credit default swaps, post-Global financial crisis

JEL Classification: G00, G01, G10, G15

Suggested Citation

Dodd, Olga and Kalimipalli, Madhu and Chan, Wing H., Evaluating Corporate Credit Risks in Emerging Markets (October 1, 2020). International Review of Financial Analysis, Vol. 73, No. 101610, 2021, Available at SSRN: https://ssrn.com/abstract=3109160 or http://dx.doi.org/10.2139/ssrn.3109160

Olga Dodd

Auckland University of Technology ( email )

Auckland, 1142
New Zealand
+6499219999 ext 5423 (Phone)

Madhu Kalimipalli (Contact Author)

Lazaridis School of Business and Economics, Wilfrid Laurier University ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710 (Phone)

HOME PAGE: http://www.madhukalimipalli.com/

Wing H. Chan

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710, ext. 2773 (Phone)
519-888-1015 (Fax)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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