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The foreign exchange exposure of capital structure: the 1997 Asian crises revisited

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  • Tsung-Wu Ho
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    Abstract

    The financial crisis of East Asia in 1997 was largely unanticipated and was characterized by the fact that drastic currency depreciation worsens the corporate capital structure and brought widespread financial turmoil. This paper attempts to examine the vicious cycle mechanism of East Asia crisis. A dynamic panel model is proposed to estimate the foreign exchange exposure of capital structure. Using precrisis data, it is shown that the Asian crisis is in fact a problem of structural vulnerability underlying most Asian economies. First, Hong Kong and Singapore have less risky capital structure before the crisis, which also have smaller exposure magnitude. Secondly, Thailand and Korea have more risky capital structure before the crisis and significant vicious cycles are found. These appropriately explain the vicious cycle between currency crisis and domestic financial turmoil: drastic depreciation worsens the debt ratio.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 14 (2004)
    Issue (Month): 7 ()
    Pages: 497-505

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    Handle: RePEc:taf:apfiec:v:14:y:2004:i:7:p:497-505

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    1. Bruce E. Hansen, 1997. "Threshold effects in non-dynamic panels: Estimation, testing and inference," Boston College Working Papers in Economics 365, Boston College Department of Economics.
    2. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, number 9780521818551.
    3. Chowdhry, Bhagwan & Goyal, Amit, 2000. "Understanding the financial crisis in Asia," Pacific-Basin Finance Journal, Elsevier, vol. 8(2), pages 135-152, May.
    4. Cohen, Wesley M & Klepper, Steven, 1992. "The Anatomy of Industry R&D Intensity Distributions," American Economic Review, American Economic Association, vol. 82(4), pages 773-99, September.
    5. Baer, Werner & Miles, William R. & Moran, Allen B., 1999. "The end of the Asian Myth: Why were the Experts Fooled?," World Development, Elsevier, vol. 27(10), pages 1735-1747, October.
    6. Friend, Irwin & Lang, Larry H P, 1988. " An Empirical Test of the Impact of Managerial Self-interest on Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 43(2), pages 271-81, June.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Bodnar, Gordon M. & Gentry, William M., 1993. "Exchange rate exposure and industry characteristics: evidence from Canada, Japan, and the USA," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 29-45, February.
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