Three essays on financial crisis

Description

This dissertation presents three essays. The first analyzes the determinants of the fiscal costs and output loss for a broad sample of countries experiencing a banking crisis. It explores three hypotheses: crisis countries with a greater supply of financial professionals, all else equal, experienced lower fiscal costs and output loss than countries with a smaller supply; policy measures contributed to the fiscal costs and output loss; and countries with a limited supply of financial professionals typically adhere to civil rather than common law. The essay does not find strong statistical support in cross-national data for the hypothesis that specialized professions reduce the fiscal costs and output loss of crisis in countries undergoing restructuring. It does, however, find robust statistical evidence that the fiscal costs and output loss during a crisis are not predetermined, and much of the variation is explained by policy measures. Of particular interest is the finding that the blanket guarantee dummy is very significant and robust to any specification. The essay finds evidence pointing to the legal tradition as an important determinant of the availability of professions. The second essay tests the hypothesis that market-based financial systems work better than bank-based systems because they provide backup intermediation and facilitate restructuring in the aftermath of a crisis. It tests the hypothesis using cross-country empirical data and multiple measures and tests. It does not find empirical support for the hypothesis. The third essay starts by presenting descriptive data suggesting that corporate financial fragility preceded the wave of financial crises in East Asia. It presents evidence of rapid investment leading to high leverage and poor profitability preceding the crisis. Calculations of economic value added (EVA) suggest that negative EVA preceded the crisis throughout Asia. All the countries in the region undertook massive corporate restructuring after the crisis, with Malaysia and Korea bouncing back much faster than the rest. After reviewing the trends, the essay introduces a model with factors determining capital structure. The model considers factors related to the demand for and supply of debt and explores the hypothesis that debt in the Asian crisis countries increased far beyond what was justified by the fundamentals. The analysis offers robust statistical evidence that the increase in leverage in the crisis countries was excessive. The essay also finds that financial development played a limited role in the increase in debt ratios, while capital inflows played a larger role.

Subjects