Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia
29 Pages Posted: 15 Feb 2006
Date Written: October 1999
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.
Keywords: corporate leverage bankruptcy capital sales east Asian crisis output contractions
JEL Classification: E22 E65 G30 O53
Suggested Citation: Suggested Citation