Corporate Debt, Firm Size and Financial Fragility in Emerging Markets
The post-Global Financial Crisis period shows a surge in corporate leverage in emerging markets and a number of countries with deteriorated corporate financial fragility indicators (Altman’s Z-score). Firm size plays a critical role in the relationship between leverage, firm fragility, and exchange rate movements in emerging markets. While the relationship between firm leverage and distress scores varies over time, the relationship between firm size and corporate vulnerability is relatively time invariant. All else being equal, large firms in emerging markets are more financially vulnerable and also systemically important. Consistent with the granular origins of aggregate fluctuations in Gabaix (2011), idiosyncratic shocks to the sales growth of large firms are positively and significantly correlated with GDP growth in our emerging markets sample. Relatedly, the negative impact of exchange rate shocks has a more acute impact on the sales growth of the more highly levered large firms.
Keywords: corporate debt; firm size; financial fragility; emerging market; Organizations; Borrowing and Debt; Financial Condition; Emerging Markets; System Shocks;
Citation:
Alfaro, Laura, Gonzalo Asis, Anusha Chari, and Ugo Panizza. "Corporate Debt, Firm Size and Financial Fragility in Emerging Markets." Journal of International Economics 118 (May 2019): 1–19. (Also NBER Working Paper 25459.) View Details