Industry and Financial Crises in Fragile and Zombie Firms: Does Leverage Matter?

2018 ◽  
Vol 3 (3) ◽  
pp. 51-58
Author(s):  
Santi Novita ◽  
Bambang Tjahjadi ◽  
Andry Irwanto
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Jel Classification ◽  
Significant Implication ◽  
Financial Firms ◽  
Financial Soundness

Objective - This paper shows how leverage affects firm's fragility and financial soundness during financial and industry crises. Methodology/Technique - Long term inefficient and zombie firms are explored through the effects of leverage in additional tests. Findings - There are two main results obtained from the sample of Indonesian non-financial firms from 2007 to 2016. First, leverage has a statistically significant correlation with firm's fragility. Second, leverage has an effect on firm's financial soundness during industry crisis. Novelty - Unlike the previous paper, this paper demonstrates a significant implication on the need to differentiate fragile firms and firms that are persistently inefficient, such as zombie firms. Type of Paper: Empirical. Keywords: Fragility; Zombie; Financial Soundness; Leverage; Industry Crisis; Financial Crisis. JEL Classification: M20, M41.

scholarly journals A Macroeconomic Model With Financially Constrained Producers and Intermediaries

Econometrica ◽  
2021 ◽  
Vol 89 (3) ◽  
pp. 1361-1418
Author(s):  
Vadim Elenev ◽  
Tim Landvoigt ◽  
Stijn Van Nieuwerburgh
Keyword(s):  
Financial Crises ◽  
Capital Requirements ◽  
Financial Fragility ◽  
Financial Intermediaries ◽  
Capital Regulation ◽  
Sharp Change ◽  
Bank Capital ◽  
Financial Firms ◽  
Bank Capital Regulation

How much capital should financial intermediaries hold? We propose a general equilibrium model with a financial sector that makes risky long‐term loans to firms, funded by deposits from savers. Government guarantees create a role for bank capital regulation. The model captures the sharp and persistent drop in macro‐economic aggregates and credit provision as well as the sharp change in credit spreads observed during financial crises. Policies requiring intermediaries to hold more capital reduce financial fragility, reduce the size of the financial and non‐financial sectors, and lower intermediary profits. They redistribute wealth from savers to the owners of banks and non‐financial firms. Pre‐crisis capital requirements are close to optimal. Counter‐cyclical capital requirements increase welfare.

scholarly journals Measuring the probability of a financial crisis

2019 ◽  
Vol 116 (37) ◽  
pp. 18341-18346 ◽  
Author(s):  
Robert F. Engle ◽  
Tianyue Ruan
Keyword(s):  
Financial Crisis ◽  
Systemic Risk ◽  
Financial Crises ◽  
Risk Measures ◽  
Financial Sector ◽  
Developed Countries ◽  
Financial Firms ◽  
Capacity Measure ◽  
Natural Response ◽  
Tail Events

When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalization of the financial sector. Market-based measures of systemic risk such as SRISK, which stands for systemic risk, enable monitoring how such weakness emerges and progresses in real time. In this paper, we develop quantitative estimates of the level of systemic risk in the financial sector that precipitates a financial crisis. Common approaches to reduce leverage correspond to specific scaling of systemic risk measures. In an econometric framework that recognizes financial crises represent left tail events for the economy, we estimate the relationship between SRISK and the financial crisis severity for 23 developed countries. We develop a probability of crisis measure and an SRISK capacity measure based on our estimates. Our analysis highlights the important global externality whereby the risk of a crisis in one country is strongly influenced by the undercapitalization of the rest of the world.

Long-Term Scarring from the Financial Crisis

2009 ◽  
Vol 210 ◽  
pp. 36-38 ◽  
Author(s):  
Ray Barrell
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Asset Prices ◽  
Banking Sector ◽  
Oecd Countries ◽  
Risk Premia ◽  
Crisis Period ◽  
Permanent Effect ◽  
Output Costs

It is useful to look at the distinction between transitory and permanent effects of a crisis. Financial crises normally bring on a recession, and the output costs can be large, as Hoggarth and Saporta (2001) discuss. In the majority of cases since 1970 in the OECD countries output returns to its trend level and there is no permanent effect. However, there may have been a permanent scar on the level of output in Japan after its crisis in the early 1990s, making the crisis and subsequent recession much more costly. This may reflect the nature and length of the crisis, as the banking sector was left to flounder for some years before its rescue toward the end of the crisis period. This appears to have left a permanent scar because risk premia were subsequently higher, and real asset prices have not fully recovered.

The Impact of Global Financial Crises

2018 ◽  
pp. 328-344
Author(s):  
Walden Bello
Keyword(s):  
Economic Policy ◽  
Financial Crisis ◽  
Financial Crises ◽  
Global Financial Crisis ◽  
Financial Analysis ◽  
Inadequate Response ◽  
Donald Trump ◽  
Keynesian Economics ◽  
The Impact

This chapter focuses on the 2008 global financial crisis (GFC) and shows the long-term impacts of the GFC on US politics and global economic policy. In particular, the chapter analyzes the surprisingly inadequate response of the Obama administration, which accelerated the failure of Keynesianism and opened the door to Hillary Clinton’s stunning 2016 electoral loss to the national populist Donald Trump. The chapter argues that the unfolding of the GFC brought Keynesian economics to the forefront, with neoliberalism beating a hasty retreat in the immediate aftermath of the crisis. Keynesian economists had correctly anticipated the crisis, but even they were probably surprised by its severity. It was not only for the accuracy of their financial analysis but for the policy tools they offered for dealing with the unfolding crisis that their expertise was sought.

The Oxford Handbook of Banking and Financial History

2016 ◽  
Keyword(s):  
Financial Crisis ◽  
Great Depression ◽  
Economic History ◽  
Financial Crises ◽  
Financial Regulation ◽  
Financial History ◽  
The Great Depression ◽  
Historical Reflection ◽  
Methodological Aspects

The financial crisis of 2008 aroused widespread interest in banking and financial history among policy makers, academics, journalists, and even bankers, in addition to the wider public. References in the press to the term ‘Great Depression’ spiked after the failure of Lehman Brothers in November 2008, with similar surges in references to ‘economic history’ at various times during the financial turbulence. In an attempt to better understand the magnitude of the shock, there was a demand for historical parallels. How severe was the financial crash? Was it, in fact, the most severe financial crisis since the Great Depression? Were its causes unique or part of a well-known historical pattern? And have financial crises always led to severe depressions? Historical reflection on the recent financial crises and the long-term development of the financial system go hand in hand. This volume provides the material for such a reflection by presenting the state of the art in banking and financial history. Nineteen highly regarded experts present twenty-one chapters on the economic and financial side of banking and financial activities, primarily—though not solely—in advanced economies, in a long-term comparative perspective. In addition to paying attention to general issues, not least those related to theoretical and methodological aspects of the discipline, the volume approaches the banking and financial world from four distinct but interrelated angles: financial institutions, financial markets, financial regulation, and financial crises.

Controlling the Long-Term Problem of Short-Term Funding

2019 ◽  
Vol 5 (2) ◽  
pp. 101-149
Author(s):  
Brian A Johnson ◽  
Hal S Scott
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Financial System ◽  
Social Benefits ◽  
Costs And Benefits ◽  
Short Term ◽  
The Social ◽  
Recent Financial Crisis ◽  
Funding Issue

Abstract While financial crises can be triggered by several causes, runs on short-term liabilities are at the heart of all financial crises, with the recent 2007–09 financial crisis being no exception. Given the unpredictability of crisis triggers and the overwhelming predictability of short-term funding’s role in financial crises, legislative and regulatory responses to the recent financial crisis should focus on the consequences of relying on short-term funding in the financial system. However, in addressing the problem of such funding, it is important to recognize the social benefits afforded by short-term liabilities and not simply the costs. To this end, this paper provides a brief overview of short-term funding in the U.S. financial system, while also highlighting the trade-off between the costs and benefits of short-term liabilities. The paper proceeds with an analysis of various proposals aimed at addressing the short-term funding issue.

Economic Institutions and Growth Nexus: The Role of Governance and Democratic Institutions—Evidence from Time Varying Parameters’ (TVPs) Models

2016 ◽  
Vol 55 (4I-II) ◽  
pp. 675-688
Author(s):  
Ghulam Murtaza ◽  
Muhammad Zahir Faridi
Keyword(s):  
Structural Changes ◽  
Jel Classification ◽  
Economic Institutions ◽  
Time Varying ◽  
Democratic Institutions ◽  
Main Hypothesis ◽  
Dynamic Relationship ◽  
Rolling Window

The present study has investigated the channels through which the linkage between economic institutions and growth is gauged, by addressing the main hypothesis of the study that whether quality of governance and democratic institutions set a stage for economic institutions to promote the long-term growth process in Pakistan. To test the hypothesis empirically, our study models the dynamic relationship between growth and economic institutions in a time varying framework in order to capture institutional developments and structural changes occurred in the economy of Pakistan over the years. Study articulates that, along with some customary specifics, the quality of government and democracy are the substantial factors that affect institutional quality and ultimately cause to promote growth in Pakistan. JEL Classification: O40; P16; C14; H10 Keywords: Economic Institutions, Growth, Governance and Democracy, Rolling Window Two-stage Least Squares, Pakistan

The Influence of Growth, Asset Tangibility, Cost of Debt, Profitability and Business Risk On Debt Capital

2019 ◽  
Vol 4 (4) ◽  
pp. 120-127
Author(s):  
Erika Jimena Arilyn ◽  
Beny Beny
Keyword(s):  
Firm Growth ◽  
Stock Exchange ◽  
Panel Data Analysis ◽  
Developed Countries ◽  
Jel Classification ◽  
Cost Of Debt ◽  
Market Condition ◽  
Business Risk ◽  
Debt Capital

Objective –The aims to identify the significant factors that influence a company’s decision to use debt capital. Methodology/Technique – This study uses 5 independent variables namely; firm growth (growth rate in total gross assets), asset tangibility (ratio of net fixed assets to total assets), cost of debt (interest before tax / long term debt), profitability (Earnings Before Interest and Taxes (EBIT) / Total Asset), and business risk (standard deviation of EBIT to total assets). The dependent variable in this study, debt capital, is measured by the ratio of long-term debt to total assets. A purposive sampling method is used to select 11 out of 18 textile and garment companies listed on the Indonesian Stock Exchange between 2014 and 2018 that report their annual financial positions. A quantitative method, panel data analysis technique and SPSS tools were also used in this study. Findings – The results show that debt capital is influenced by profitability, while the remaining factors do not influence debt capital. Novelty – This study adds to the existing literature on internal factors, market condition as an external factors, and debt capital in developed countries. The benefit of this study is to explore the potential capabilities of the industry in using its profit to minimize the use of debt as a source of capital to decrease business risk. Type of Paper: Empirical Keywords: Profitability; Growth; Cost of Debt; Business Risk; Tangibility; Capital Structure. Reference to this paper should be made as follows: Ariyln, E., J; Beny; 2019. The Influence of Growth, Asset Tangibility, Cost Of Debt, Profitability and Business Risk On Debt Capital, Acc. Fin. Review 4 (4): 120 – 127 https://doi.org/10.35609/afr.2019.4.4(4) JEL Classification: G23, G32.

The Long-Term Cost of the Financial Crisis

2009 ◽  
Author(s):  
Murillo Campello ◽  
John R. Graham ◽  
Campbell R. Harvey
Keyword(s):  
Financial Crisis
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