Corporate Performance in the East Asian Financial Crisis

The sharp decline in the once-stellar performance of East Asian corporations following the 1997 financial crisis has sparked an intense debate. Some observers argue that external shocks, including a drop in aggregate demand and a shortage of working capital, explain the corporate sector’s poor performance. Others assert that the difficulties were apparent well before the crisis and that the risky financial policies pursued by these firms left them vulnerable. A survey of the literature shows little microeconomic evidence to support either view. This article compares the growth and financing patterns of East Asian corporations in the years before the crisis with those in other countries. It finds little microeconomic evidence that corporate growth was weakening but some support for the argument that many firms had a weak financial structure that left them vulnerable to an economic downturn. Based on a sample of more than 850 publicly listed firms in the four crisis countries— Indonesia, Malaysia, the Republic of Korea, and Thailand—and two comparators, Hong Kong (China) and Singapore, it appears that firm-specific weaknesses already in existence before the crisis were important factors in the deteriorating performance of the corporate sector. The East Asian crisis has sparked a large body of literature seeking to explain its causes, onset, and evolution. Whether sudden shifts in market expectations and confidence were the primary source of the financial turmoil has been hotly debated. Proponents of this view argue that although some macroeconomic and other fundamentals may have worsened in the mid-1990s, the extent and depth of the crisis can be attributed not to a deterioration in fundamentals but rather to the panicky reaction of anxious domestic and foreign investors (Furman and Stiglitz 1998; Radelet and Sachs 1998). Others argue that the crisis reflected structural and policy distortions in the region, including weak macroeconomic policies, and that fundamental