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Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?

Author

Listed:
  • Nigel Driffield

    (Aston Business School, Birmingham, UK)

  • Vidya Mahambare

    (Cardiff Business School, Cardiff UK)

  • Sarmistha Pal

    (Department of Economics & Finance, Brunel University, UK)

Abstract

While the aggregate macroeconomic analysis of the recent Asian Crisis highlights the moral hazard problem of bad loans in poorly supervised and regulated East Asian economies, there is very little firm-level analysis to characterize it. The present paper attempts to fill in this gap of the literature and focuses on the process of dynamic adjustment of the actual leverage towards the optimum. Our results based on the Worldscope firm-level panel data indicate a close correspondence between excess leverage and excess capital stock and also reveal signs of corporate inertia. This inertia has been evident not only among firms with excess capital stock, but also among those with larger share of short-term debt in the worst affected countries, especially during the pre-crisis and crisis periods; the adjustment process was however speeded up in the post-crisis period. One possible way out of this problem of bad loans would be to develop the equity market and induce the firms to rely more on equity finance.

Suggested Citation

  • Nigel Driffield & Vidya Mahambare & Sarmistha Pal, 2005. "Dynamic Adjustment of Corporate Leverage: Is there a lesson to learn from the Recent Asian Crisis?," Finance 0505011, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0505011
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    More about this item

    Keywords

    Moral hazard; Over-lending and over-investment; Speed of adjustment; Inertia; Generalised Methods of Moments;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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