Some theoretical crisis models of third generation incorporate the "balance sheet effect" emphasized by Bernanke and Gertler (1989) and many papers since. In a crisis context this mechanism, based on asymmetric information in the credit market, describes how a currency depreciation affects domestic firms' investment. This paper proposes an empirical validation of this theoretical prediction. To this end, we study the investment behaviour of 477 Korean manufacturing firms, particularly during the 1997 Asian crisis. However, contrary to many studies in which cash flow account variable is used as proxy for entrepreneurs' net worth, our analysis focuses on a more relevant variable, the cash stock, to measure these internal funds. The preliminary results stipulate that firms' balance sheets in the aftermath of the Asian crisis, are more robust in explaining investment than before the crisis. It is further shown that this relationship is more relevant for small firms.
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Article provided by Economics Bulletin in its journal Economics Bulletin.
Find related papers by JEL classification: F3 - International Economics - - International Finance D2 - Microeconomics - - Production and Organizations
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