BFS 2002

Contributed Talk

Corporate Financial Policies and Performance Around Currency Crises

Vicente Pons, Arturo Bris, Yrjo Koskinen

Using company level data from 17 countries that have suffered a currency crisis during the past decade, this paper documents that firms have increasing leverage and declining profitability prior to a crisis. After sorting companies into two groups based on their exchange rate exposure, we show that companies that benefit from currency depreciations have higher leverage, lower earnings to revenue ratios and lower interest coverage ratios compared to firms that are harmed by currency deprecations. We also provide evidence that the Asian crisis is different from the previous European and Latin American ones: in Asia firms become more fragile after the crises and their profitability declines further, whereas in Europe and Latin America there are clear signs of recovery.