Corporate Finance Lessons from the East Asian Crisis
Author: Michael Pomerleano Date: 10/1/1998 (PDF, 200KB)
This Note examines the corporate roots of the financial crisis in East Asia. For some economies, especially Indonesia, the Republic of Korea, and Thailand, clear evidence emerges of a rapid and unsustainable buildup of investment in fixed assets financed by excessive borrowing. This investment spending spree resulted in poor profitability. The findings support a view advanced by Paul Krugman that crony capitalism--and the associated policies of implicit guarantees--and poor banking supervision led to poor credit decisions in the banking system.