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

Download or read book Corporate Leverage, Bankruptcy, and Output Adjustment in Post-Crisis East Asia written by Mr.Se-Jik Kim and published by International Monetary Fund. This book was released on 1999-10-01 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.