SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: Using data from 17 countries that have suffered a currency crisis, this paper studies firm-level leverage and performance measures before and after a crisis has occurred. We show that in the years preceding a currency crisis, companies that are expected to benefit from currency depreciations increase their leverage more than companies that are expected to be harmed by currency depreciations. The evidence regarding the profitability and financial fragility ratios is consistent with the leverage results, since companies that are expected to benefit from depreciations fare worse than other companies before a crisis. 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 crisis and their profitability declines and leverage increases further, whereas in Europe and Latin America there are clear signs of recovery after a crisis has occurred, especially for firms that are ex-ante expected to benefit from depreciations.

Keywords: currency crises; currency depreciation; corporate leverage; capital structure; profitability; financial fragility; exchange rates

JEL-codes: F34; G33; G34

51 pages, First version: October 17, 2001. Revised: June 6, 2002. Earlier revisions: November 6, 2001, June 6, 2002.

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