Skip to main content
SpringerLink
Log in

ARTICLES

Corporate financing in East Asia before the 1997 crash

  • Regular Section
  • Published:
Journal of International Business Studies Aims and scope Submit manuscript

Abstract

Some argue that corporate finance and governance practices were among the root causes of the Asian crisis. It is alleged that high and increasing corporate debt ratios were partly to blame. This claim is overstated: only South Korea and arguably Thailand had leverage ratios significantly above the G7 range, and only South Korea had an income-gearing ratio higher than the G7. Although the reliance on short-term debt was high, there was no drastic change in the maturity structure of debt before the crash. However, conventional factors are relatively more successful in explaining leverage for firms that were less closely connected to the relationship-based financing system. Our paper links to ongoing research on investor protection, cronyism, connections between business and government, and business groups. It ends by commenting on the 2008 financial crisis, currently engulfing the world, and highlights some similarities and paradoxes.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Burton and Zanello (2007), Claessens, Djankov and Klapper (2003), Corsetti, Pesenti and Roubini (1999), Economist (2007), Lee and Biers (1998), Pomerleano (2007).

  2. The high reliance on short-term debt might be potentially caused by limited access to long-term debt; by lenders feeling that their rights would be better protected with short-term debt; or by the cost of rolling over short-term debt being perceived to be cheaper than long-term debt. However, it is difficult to see why the first two explanations should apply to Hong Kong and Singapore.

  3. The coefficients (t-statistics), for the highest M/B quartile are: Hong Kong −0.05 (1.83), Korea −0.1 (1.34) and Malaysia −0.03 (2.11). The coefficients in the lowest M/B quartiles in Hong Kong and Korea are positive and significant.

  4. The coefficients in the low- and high-profitability quartiles (with t-ratios) are: Hong Kong −0.68 (−2.90) to −2.20 (−1.98), Indonesia −3.97 (−2.98) to −2.10 (−2.31), Korea −1.23 (−3.39) to −2.60 (−4.79), Malaysia −0.12 (−0.07) to −0.81 (−0.92), Singapore −0.19 (−0.31) to −1.41 (−1.61) and Thailand −1.46 (−1.08) to −3.63 (−3.41), respectively. The differences in the coefficients are significant at 5%.

  5. The 14th largest chaebol, Hanbo, borrowed US$5.8 billion, much of it without any collateral (Marriott, 1997).

References

  • Agmon, T. 2006. Bringing financial economics into international business research: Taking advantage of a paradigm change. Journal of International Business Studies, 37 (5): 575–577.

    Article  Google Scholar 

  • Allayannis, G., Brown, G., & Klapper, L. 2003. Capital structure and financial risk: Evidence from foreign debt use in East Asia. Journal of Finance, 58 (6): 2667–2709.

    Article  Google Scholar 

  • Atkin, M., & Glen, J. 1992. Comparing capital structures around the globe. International Executive, 34 (5): 369–387.

    Article  Google Scholar 

  • Backman, M. 1999. Asian eclipse: Exposing the dark side of business in Asia. Singapore: John Wiley.

    Google Scholar 

  • Bank for International Settlements. 1997. The maturity, sectoral and nationality distribution of international bank lending. Basel: BIS.

  • Bank for International Settlements. 1998. Financial intermediation and the Asian crisis: 68th annual report. Basel: BIS.

  • Barclay, M., & Smith, C. 1995. The maturity structure of corporate debt. Journal of Finance, 50 (2): 609–631.

    Article  Google Scholar 

  • Berger, A., & Udell, G. 1995. Relationship lending and lines of credit in small firm finance. Journal of Business, 68 (3): 351–381.

    Article  Google Scholar 

  • Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. 2001. Capital structures in developing countries. Journal of Finance, 56 (1): 87–130.

    Article  Google Scholar 

  • Bos, T., & Fetherston, T. 1993. Capital structure practices on the Pacific Rim. Research in International Business and Finance, 10: 53–66.

    Google Scholar 

  • Buckley, P. 2002. Is the international business research agenda running out of steam? Journal of International Business Studies, 33 (2): 365–373.

    Article  Google Scholar 

  • Burton, D., & Zanello, A. 2007. Asia ten years after. http://www.imf.org/external/pubs/ft/fandd/2007/06/burton.htm. Accessed 13 October 2007.

  • Chang, H.-J., Park, H.-J., & Yoo, C. 2001. Interpreting the Korean crisis. In H.-J. Chang, J. G. Palma & D. H. Whittaker (Eds), Financial liberalization and the Asian crisis: 140–155. London: Palgrave Macmillan.

    Chapter  Google Scholar 

  • Chang, S., Chung, C., & Mahmood, I. 2006. When and how does business group affiliation promote firm innovation? A tale of two emerging economies. Organization Science, 17 (5): 637–656.

    Article  Google Scholar 

  • Chong-Tae, K. 1998. Surgery of the chaebols. Business Korea, 15 (January): 34–35.

    Google Scholar 

  • Claessens, S., Djankov, S., & Klapper, L. 2003. Resolution of corporate distress in East Asia. Journal of Empirical Finance, 10 (1–2): 199–216.

    Article  Google Scholar 

  • Corsetti, G., Pesenti, P., & Roubini, N. 1999. What caused the Asian currency and financial crisis? Japan and the World Economy, 11 (3): 305–373.

    Article  Google Scholar 

  • Delhaise, P. 1998. Asia in crisis: The implosion of the banking and finance systems. Singapore: John Wiley.

    Google Scholar 

  • Demirguc-Kunt, A., & Maksimovic, V. 1999. Institutions, financial markets, and firm debt maturity. Journal of Financial Economics, 54 (3): 295–336.

    Article  Google Scholar 

  • Dissanaike, G. 1997. Do stock market investors overreact? Journal of Business Finance & Accounting, 24 (1): 27–49.

    Article  Google Scholar 

  • Economist. 2007. Gold from the storm – East Asian economies. 30 June: 83.

  • Fama, E., & French, K. 1992. The cross-section of expected stock returns. Journal of Finance, 47 (2): 427–465.

    Article  Google Scholar 

  • Financial Times. 2008. Asia looks to IMF relations 10 years after its own crisis. 10 November: 3.

  • Fischer, S. 1998. The Asian crisis: A view from the IMF. Paper presented at the mid-winter conference of the Bankers’ Association for Foreign Trade, January. http://www.imf.org/external/np/speeches/1998/012298.htm, accessed 15 February 2008.

  • Fogel, K. 2006. Oligarchic family control, social economic outcomes, and the quality of government. Journal of International Business Studies, 37 (5): 603–622.

    Article  Google Scholar 

  • Frankel, J. A. 2005. Contractionary currency crashes in developing countries. IMF Staff Papers, 52 (2): 149–192.

    Google Scholar 

  • Fukuda, S., & Kon, Y. 2007. Liquidity risk aversion, debt maturity, and current account surpluses: A theory and evidence from East Asia. Working Paper W13004, National Bureau of Economic Research.

  • Harris, M., & Raviv, A. 1991. The theory of capital structure. Journal of Finance, 66 (1): 297–349.

    Article  Google Scholar 

  • Harvey, C., Lins, K., & Roper, A. 2002. The effect of capital structure when expected agency costs are extreme. Journal of Financial Economics, 74 (1): 3–30.

    Article  Google Scholar 

  • Heinkel, R. 1982. A theory of capital structure relevance under imperfect information. Journal of Finance, 37 (5): 1141–1150.

    Article  Google Scholar 

  • Ito, T. 2007. Asian currency crisis and the International Monetary Fund, 10 years later: Overview. Asian Economic Policy Review, 2 (1): 16–49.

    Article  Google Scholar 

  • Jiangli, W., Unal, H., & Yom, C. 2006. Relationship lending, accounting disclosure and credit availability during the Asian financial crisis. Robert H. Smith School Research Paper 06-022, University of Maryland.

  • Joh, W. S. 2003. Corporate governance and firm profitability: Evidence from Korea before the economic crisis. Journal of Financial Economics, 68 (2): 287–322.

    Article  Google Scholar 

  • Kawai, M., Hahm, H., & Iarossi, G. 1999. Corporate foreign debt in East Asia: Too much or too little? Paper presented at the World Bank conference on “Asian corporate recovery”, Bangkok, March/April, http://www.iss.u-tokyo.ac.jp/~kawai/pdffiles/respa/wb2000.pdf, accessed 2 April 2009.

  • Khanna, T., & Yafeh, Y. 2007. Business groups in emerging markets: Paragons or parasites? Journal of Economic Literature, 45 (2): 331–372.

    Article  Google Scholar 

  • Khatri, N., Tsang, E., & Begley, T. 2006. Cronyism: A cross cultural analysis. Journal of International Business Studies, 37 (1): 61–75.

    Article  Google Scholar 

  • Krugman, P. 1998. What happened to Asia? http://web.mit.edu/krugman/www/DISINTER.html. Accessed 15 March 2005.

  • Kwok, C., & Tadesse, S. 2006. National culture and financial systems. Journal of International Business Studies, 37 (2): 227–247.

    Article  Google Scholar 

  • Lee, C., & Biers, D. 1998. Remaking Korea. Far Eastern Economic Review, 30 (April): 10–13.

    Google Scholar 

  • Leuz, C., & Oberholzer-Gee, F. 2006. Political relationships, global financing and corporate transparency: Evidence from Indonesia. Journal of Financial Economics, 81 (2): 411–435.

    Article  Google Scholar 

  • Lim, U. 1995. Corporate ownership structure and corporate governance mechanism: With experience of Korean firms. Advances in Pacific Basin Business, Economics and Finance, 1: 293–310.

    Google Scholar 

  • Marriott, C. 1997. Chaebol: Misfits of global finance. Global Finance, 11 (3): 34–37.

    Google Scholar 

  • Myers, S. 1977. Determinants of corporate borrowing. Journal of Financial Economics, 5 (2): 147–175.

    Article  Google Scholar 

  • Myers, S., & Majluf, N. 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13 (2): 187–221.

    Article  Google Scholar 

  • Pomerleano, M. 2007. Corporate financial restructuring in Asia: Implications for financial stability. BIS Quarterly Review (September): 87–94.

  • Price Waterhouse. 1995–1996. Corporate taxes: A worldwide summary. New York: Price Waterhouse.

  • Radelet, S., & Sachs, J. 1998. The onset of the East Asian financial crisis. Working Paper W6680, National Bureau of Economic Research.

  • Rajan, R., & Zingales, L. 1995. What do we know about capital structure? Some evidence from international data. Journal of Finance, 50 (5): 1421–1460.

    Article  Google Scholar 

  • Reinhart, C., & Rogoff, K. 2008. This time is different: A panoramic view of eight centuries of financial crises. http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different_SHORT.pdf. Accessed 14 November 2008.

  • Rodriguez, P., Siegel, D. S., Hillman, A., & Eden, L. 2006. Three lenses on the multinational enterprise: Politics, corruption, and corporate social responsibility. Journal of International Business Studies, 37 (6): 733–746.

    Article  Google Scholar 

  • Ross, S. 1977. The determination of financial structure: The incentive signalling approach. Bell Journal of Economics, 8 (2): 23–40.

    Article  Google Scholar 

  • Shenkar, O. 2004. One more time: International business in a global economy. Journal of International Business Studies, 35 (2): 161–171.

    Article  Google Scholar 

  • Singh, A. 1995. Corporate financial patterns in industrializing economies: A comparative international study. IFC Technical Paper 2, Washington, DC.

  • Singh, A. 2003. Competition, corporate governance, and selection in emerging markets. Economic Journal, 113 (491): 443–464.

    Article  Google Scholar 

  • Stiglitz, J. 1999. Lessons from East Asia. Journal of Policy Modelling, 21 (3): 311–330.

    Article  Google Scholar 

  • Stiglitz, J. 2007. The Asian crisis ten years after. http://www.project-syndicate.org/commentary/stiglitz8. Accessed 12 November 2007.

  • Wan, W., Yiu, D., Hoskisson, R., & Kim, H. 2008. The performance implications of relationship banking during macroeconomic expansion and contraction: A study of Japanese banks’ social relationship and overseas expansion. Journal of International Business Studies, 39 (3): 406–427.

    Article  Google Scholar 

  • Weiner, R. 2005. Speculation in international crises: Report from the Gulf. Journal of International Business Studies, 36 (5): 576–587.

    Article  Google Scholar 

  • World Bank. 1993. The East Asian miracle: Economic growth and public policy. Oxford: Oxford University Press.

  • World Bank. 1995. World development report. Washington, DC: World Bank.

  • World Bank. 1998. World development indicators. Washington, DC: World Bank.

Download references

Acknowledgements

We are grateful to Lorraine Eden, Arie Lewin, the anonymous referees, Dong He, Paul Kattuman, Bart Lambrecht, Kim-Hwa Lim and Geoff Whittington for comments on earlier drafts.

Author information

Authors and Affiliations

  1. Judge Business School, Cambridge University, Cambridge, UK

    Gishan Dissanaike

  2. Jumeirah Capital, Dubai, UAE

    Imran Markar

Authors
  1. Gishan Dissanaike
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Imran Markar
    View author publications

    You can also search for this author in PubMed Google Scholar

Additional information

Accepted by Lorraine Eden, Departmental Editor, 22 January 2009. This paper has been with the authors for four revisions.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Dissanaike, G., Markar, I. ARTICLES. J Int Bus Stud 40, 990–1004 (2009). https://doi.org/10.1057/jibs.2009.13

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/jibs.2009.13

Keywords

Search

Navigation