Author 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 Z-scores 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 pre-AFC; and second, that in countries with higher GDP growth leverage is correlated with less corporate financial fragility. Consistent with Gabaix (2011) this 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.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: May 2017
- HBS Working Paper Number: HBS Working Paper #17-097
- Faculty Unit(s): Business, Government and International Economy
