Financial crises, debt overhang, and firm growth in transition economies

Rehman

et al. 2023

MRR

Purpose This study aims to verify the significance of Andersen (2008) corporate risk management (CRM) framework in Asian emerging markets (AEMs) to control firm risk and improve firm performance. Design/methodology/approach The cross-sectional analyses are performed on a sample of 4,609 firms across nine Asian emerging countries using 2SLS estimation technique. Findings The empirical findings show that the adoption of CRM not only enhances firm performance by increasing the firm ability to capitalize on the market opportunity but also plays a significant role in reducing firm risk. The findings of this study assert that by institutionalizing risk management practices into an integrated CRM framework, the firm can reap multiple benefits by maintaining better contractual agreements and strategic partnerships with key stakeholders. Originality/value The study shifts the focus of CRM away from Western countries toward AEMs, which has been afflicted by high risks and uncertainties. The effectiveness of CRM against firm risk is established by dividing firm risk into firm-specific risk and systematic risk. Furthermore, this study also establishes that CRM not only leads to high returns but also reduces firm operational and production costs. Overall, the study provides a compelling argument to implement CRM for improving organizational performance and managing risks in a strategic and integrated manner. The findings are also relevant to risk management practitioners, as well as to academicians interested in the broader fields of corporate finance and strategy.

Section: Corporate Risk Management and Firm Performancementioning

confidence: 99%

Does corporate risk management lead to risk mitigation and firm performance? Evidence from Asian emerging markets

Rehman

et al. 2023

MRR

“…Pirtea et al [31] reported a non-linear and negative relation between debt ratio and profitability for the Romanian public firms, which support the pecking order theory. Employing a large sample of public firms from Eastern Europe over the period from 2004-2017, Botta [32] found that a higher-than-optimal level of leverage harms capital expenditure and returns. None of these studies tested the role of fiscal policy on the relationship between leverage and firm growth.…”

Section: Literature Reviewmentioning

confidence: 99%

Debt Overhang, Gazelles’ Growth, and Fiscal Policy: A Note from the Quantile Regression Approach

et al. 2021

The paper aims to examine the relationship between leverage and firm growth and the impact of fiscal policy on this relationship using a panel data quantile regression approach. Employing a sample of gazelles from emerging Europe for the 2006–2014 period, we find that debt overhang negatively affects firm growth only for the lower growth quantiles. In addition, we found that the negative effect is higher for the gazelles located in countries with lower corporate income effective tax rates. However, for the higher growth quantiles, the impact of debt on firm growth is positive and statistically significant. Our results reconcile the mixed results of the previous studies and have practical implications for financing strategies in emerging markets.

The Review of Financial Studies

“…Recent studies with European firm-level micro data such as Kalemli-Özcan, Laeven, and Moreno (2020) and Popov, Barbiero, and Wolski (2018) find conflicting evidence with respect to the investment level and efficiency effects of high debt. Inevitably, post-2008 data are tinted by the financial crisis (Giroud and Mueller, 2017;Kuchler, 2020;Botta, 2020). During this period, investment may have fallen, not due to overhang, but because impaired banks and other intermediaries constricted the supply of credit to preserve capital (Chodorow-Reich, 2014).…”

Section: Introductionmentioning

confidence: 99%

Zombies at Large? Corporate Debt Overhang and the Macroeconomy

Jordà

Kornejew

Schularick

et al. 2022

Debt overhang is associated with higher financial fragility and slower recovery from recession. However, while household credit booms have been extensively documented to have this property, we find that corporate debt does not fit the same pattern. Newly collected data on nonfinancial business liabilities for 18 advanced economies over the past 150 years shows that, in the aggregate, greater frictions in corporate debt resolution make for slower recoveries, with weak investment and more persistent “zombie firms” and that this is an important factor in explaining the difference in outcomes relative to household credit booms.