Michael Pomerleano
Business Economics PhD
Dissertation Chair: Prof. B. Friedman
Three Essays on Financial Crisis
This dissertation presents three essays. The first analyzes the determinants of
the fiscal costs and output loss for a broad sample of countries experiencing a banking
crisis. It explores three hypotheses: crisis countries with a greater supply of financial
professionals, all else equal, experienced lower fiscal costs and output loss than
countries with a smaller supply; policy measures contributed to the fiscal costs and
output loss; and countries with a limited supply of financial professionals typically
adhere to civil rather than common law. The essay does not find strong statistical
support in cross-national data for the hypothesis that specialized professions reduce
the fiscal costs and output loss of crisis in countries undergoing restructuring. It does,
however, find robust statistical evidence that the fiscal costs and output loss during a
crisis are not predetermined, and much of the variation is explained by policy
measures. Of particular interest is the finding that the blanket guarantee dummy is
very significant and robust to any specification. The essay finds evidence pointing to
the legal tradition as an important determinant of the availability of professions.
The second essay tests the hypothesis that market-based financial systems
work better than bank-based systems because they provide backup intermediation and
facilitate restructuring in the aftermath of a crisis. It tests the hypothesis using crosscountry
empirical data and multiple measures and tests. It does not find empirical
support for the hypothesis.
The third essay starts by presenting descriptive data suggesting that corporate
financial fragility preceded the wave of financial crises in East Asia. It presents
evidence of rapid investment leading to high leverage and poor profitability preceding
the crisis. Calculations of economic value added (EVA) suggest that negative EVA
preceded the crisis throughout Asia. All the countries in the region undertook massive
corporate restructuring after the crisis, with Malaysia and Korea bouncing back much
faster than the rest. After reviewing the trends, the essay introduces a model with
factors determining capital structure. The model considers factors related to the
demand for and supply of debt and explores the hypothesis that debt in the Asian crisis
countries increased far beyond what was justified by the fundamentals. The analysis
offers robust statistical evidence that the increase in leverage in the crisis countries
was excessive. The essay also finds that financial development played a limited role in
the increase in debt ratios, while capital inflows played a larger role.
