Working Paper: NBER ID: w25459
Authors: Laura Alfaro; Gonzalo Asis; Anusha Chari; Ugo Panizza
Abstract: 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 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 Markets
JEL Codes: F34; G01; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm size (L25) | financial vulnerability (G32) |
| leverage (G24) | financial vulnerability (G32) |
| leverage (G24) | Altman's Z-score (C39) |
| firm size (L25) | Altman's Z-score (C39) |
| currency depreciation (F31) | financial vulnerability (G32) |
| leverage + currency depreciation (F31) | financial vulnerability (G32) |