Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia

Se-Jik Kim and Mark Stone

No 1999/143, IMF Working Papers from International Monetary Fund

Abstract: 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: WP; capital stock; corporate leverage; bankruptcy; capital sales; east Asian crisis; output contractions; capital sale; liquidity shock; debt firm; output contraction; liquidity constraint; Liquidity; Stocks; Bonds; Capital inflows; Credit; East Asia; Asia and Pacific (search for similar items in EconPapers)
Pages: 29
Date: 1999-10-01
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Citations: View citations in EconPapers (17)

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