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Corporate Financial Policies and Performance Prior to Currency Crises

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  • Arturo Bris
  • Yrjö Koskinen
  • Vicente Pons

Abstract

Using company level data from 17 countries that have suffered a currency crisis during the past decade, this paper documents that firms have increasing leverage and declining profitability prior to a crisis. After sorting companies into two groups based on their exchange rate beta, we show that companies that benefit from currency depreciations have higher leverage, lower earnings to revenue ratios and lower interest coverage ratios compared to firms that are harmed by currency depreciations. These results are consistent with the recent literature that puts the financial policies and performance of corporations as the central issue in currency crisis.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp386.pdf
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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 386.

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Length: pages
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-386

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Keywords: currency crisis; corporate leverage; capital structure; profitability; exchange rates;

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References

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  1. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
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  6. Allayannis, George & Brown, Gregory W. & Klapper, Leora F., 2001. "Exchange rate risk management : evidence from East Asia," Policy Research Working Paper Series 2606, The World Bank.
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  16. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2001. "Currency crises and monetary policy in an economy with credit constraints," European Economic Review, Elsevier, vol. 45(7), pages 1121-1150.
  17. Simon Johnson & Peter Boone & Alasdair Breach & Eric Friedman, 1999. "Corporate Governance in the Asian Financial Crisis," William Davidson Institute Working Papers Series 297, William Davidson Institute at the University of Michigan.
  18. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September.
  19. 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.
  20. Arturo Bris & Yrjo Koskinen, 2000. "Corporate Leverage And Currency Crises," Yale School of Management Working Papers ysm139, Yale School of Management, revised 01 Oct 2008.
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  22. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc.
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