Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?

Nigel Driffield, Vidya Mahambare () and Sarmistha Pal

Finance from University Library of Munich, Germany

Abstract: While the aggregate macroeconomic analysis of the recent Asian Crisis highlights the moral hazard problem of bad loans in poorly supervised and regulated East Asian economies, there is very little firm-level analysis to characterize it. The present paper attempts to fill in this gap of the literature and focuses on the process of dynamic adjustment of the actual leverage towards the optimum. Our results based on the Worldscope firm-level panel data indicate a close correspondence between excess leverage and excess capital stock and also reveal signs of corporate inertia. This inertia has been evident not only among firms with excess capital stock, but also among those with larger share of short-term debt in the worst affected countries, especially during the pre-crisis and crisis periods; the adjustment process was however speeded up in the post-crisis period. One possible way out of this problem of bad loans would be to develop the equity market and induce the firms to rely more on equity finance.

Keywords: Moral hazard; Over-lending and over-investment; Speed of adjustment; Inertia; Generalised Methods of Moments (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2005-05-09
New Economics Papers: this item is included in nep-bec, nep-fin and nep-sea
Note: Type of Document - pdf; pages: 36
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https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0505/0505011.pdf (application/pdf)

Related works:
Working Paper: Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis? (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0505011

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