Risk Coping by Firms during the Crisis

Stephane Guimbert and Remco Oostendorp

Economic Development and Cultural Change, 2016, vol. 65, issue 1, 87 - 118

Abstract: In this article, we analyze the risk-coping behavior of Cambodian firms during the global financial crisis. Among various risk-coping strategies, we specifically analyze input smoothing (labor, raw materials, or capital). If it is costly to adjust inputs, firms will prefer to smooth the path of adjusting their inputs in response to fluctuating demand, especially when demand shocks are expected to be temporary. However, their capacity for such smoothing may be more limited for credit-constrained firms, creating a potential welfare loss due to incomplete smoothing. Using panel data of Cambodian firms at the time of the 2008 global economic crisis, we show that (1) firms try to smooth inputs especially when they believe the shock to be temporary, (2) non-credit-constrained firms are better able to smooth inputs than credit-constrained firms, and (3) the welfare loss from incomplete smoothing due to credit constraints is an order of magnitude larger than the adjustment costs of the firms that were not credit constrained. The article concludes with a discussion of the policy implications of the findings.

Date: 2016
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