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Corporate Financial Policies and Performance Prior to Currency Crises

  • Yrjo Juhani Koskinen

    ()

    (Department of Finance)

  • Arturo Bris

    ()

    (International Center for Finance)

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, while still making positive net investments. 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 deprecations. These results are consistent with the recent literature that puts the financial policies and performance of corporations as the central issue in currency crises.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm187.

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Date of creation: 07 Jul 2001
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Handle: RePEc:ysm:somwrk:ysm187
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
  2. 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.
  3. 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.
  4. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  5. 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.
  6. Jorion, Philippe, 1990. "The Exchange-Rate Exposure of U.S. Multinationals," The Journal of Business, University of Chicago Press, vol. 63(3), pages 331-45, July.
  7. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
  8. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
  9. Bris, Arturo & Koskinen, Yrjo, 2002. "Corporate leverage and currency crises," Journal of Financial Economics, Elsevier, vol. 63(2), pages 275-310, February.
  10. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
  11. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2000. "Currency Crises and Monetary Policy in an Economy with Credit Constraints," CEPR Discussion Papers 2529, C.E.P.R. Discussion Papers.
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  14. 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.
  15. Gordon M. Bodnar & M.H. Franco Wong, 2000. "Estimating Exchange Rate Exposures: Some "Weighty" Issues," NBER Working Papers 7497, National Bureau of Economic Research, Inc.
  16. Dumas, Bernard & Solnik, Bruno, 1995. " The World Price of Foreign Exchange Risk," Journal of Finance, American Finance Association, vol. 50(2), pages 445-79, June.
  17. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  18. Steven Radelet & Jeffrey Sachs, 1998. "The Onset of the East Asian Financial Crisis," NBER Working Papers 6680, National Bureau of Economic Research, Inc.
  19. Franklin Allen & Douglas Gale, 2000. "Optimal Currency Crises," Center for Financial Institutions Working Papers 00-23, Wharton School Center for Financial Institutions, University of Pennsylvania.
  20. Hodder, James E., 1982. "Exposure to exchange-rate movements," Journal of International Economics, Elsevier, vol. 13(3-4), pages 375-386, November.
  21. Adler, Michael & Dumas, Bernard, 1983. " International Portfolio Choice and Corporation Finance: A Synthesis," Journal of Finance, American Finance Association, vol. 38(3), pages 925-84, June.
  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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