Lessons Unlearned? Corporate Debt in Emerging Markets

Ugo Panizza, Gonzalo Asis, Laura Alfaro and Anusha Chari

No 12038, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper documents a set of stylized facts about leverage and financial fragility in the nonfinancial 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 Zscores 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 (search for similar items in EconPapers)
JEL-codes: F34 G01 G15 G32 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-cfn and nep-sea
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Citations: View citations in EconPapers (19)

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