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)| false Calvo, G.and C. Reinhart, 2000, “ When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options.” In Reforming the International Monetary and Financial System, edited by pp. Peter Kenenand Alexander Swoboda, 175– 201, ( Washington, D.C., International Monetary Fund).
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)| false Mody, A.and S. Megishi, 2001, “ The Role of Cross-Border Mergers and Acquisition in Asian Restructuring,” In Resolution of Financial Distress: An International Perspective on the Design of Bankruptcy Laws, Institute of Development Studies, ( Washington, D.C., the World Bank)
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Bleakley and Cowan (2002).
Ito and Pereira da Silva (1999), using a survey of 15 Thai banks, demonstrate empirically the existence of a credit crunch in Thailand during the period between 1997 and 1998 characterized by the factors described above.
According to Pomerleano (1998), the debt-equity ratios seen in Asian firms, particularly Thai and Korean, were substantially larger than those seen in Latin American, German, and U.S. companies. Debt-equity ratios of U.S. firms averaged 90 percent by the end of 1996, Latin American firms averaged 31 percent, while Thai firms averaged 155 percent.
As in other papers in the field, we concentrate on the nonfinancial sector of the economy, because it is in these sectors that investment decisions are undertaken.
Because of data limitations, the sample of firms is limited to those that remained in business (bankrupt/delisted firms are not included) during the period of analysis, so it could be argued that we are capturing the behavior of “high quality/best performing” firms in Thailand. Furthermore, the actual number of firms varies per year as new firms are listed in the Thai stock market and incorporated in the database. The actual number of firms per year in the dataset is: 1992=150, 1993=183, 1994=225, 1995=249, 1996=275, 1997=278, 1998=275, 1999=273, 2000=266, and 2001=250.
“Software and computer services” is categorized as nontradable service, as one firm, “DATAMAT, Thailand,” that falls into this category mainly engages in retail sales of the software products of other companies, such as Infosys from U.S.A.
We use market capitalization as a proxy for size.
Food sector is one of the major exporting sectors in Thailand, e.g., exporting frozen seafood, noodles, rice, etc.
Given that substantial declines in the growth of firms’ fixed assets occurred around the time of the capital inflow reversals and abrupt devaluation, we argue that a large portion of sales must have been the result of increasing levels of uncertainty and financial constraints, which forced firms to sell their assets at a discount by engaging in fire sales.
The coefficients reflecting the interest coverage ratio between tranquil and sudden stop episodes are not statistically significant at conventional levels.
ADRs, which stand for American Depositary Receipts, are certificates evidencing ownership in one or several American Depositary Shares (ADSs). ADSs are a U.S. dollar denominated form of equity ownership in a non-U.S. company—a Thai company in our case (www.adr.com).
The random effects estimator fits cross-sectional time-series regression models using a GLS estimator. Breusch-Pagan and Lagrange multiplier tests attest to the appropriate selection of the random effects estimator.
It is important to note that we tested for a potential two-way direction of causality between firm-specific variables and the dependent variable (percentage changes in fixed assets) in order to determine if right-hand-side variables need to be lagged in order to avoid potential endogeneity. The tests strongly rejected the hypothesis of causality in both directions for all firm-specific variables in the system.
To control for investment opportunities, a proxy such as total market value to its book value—a rough proxy for Tobin’s Q—could be introduced. However, the variable may not be very relevant in our case as the asset markets in Thailand are not very liquid. Further, the sample includes the period of excessive speculation, thus the market valuation may have deviated from fundamentals. Nonetheless, we consider the variable in an alternative specification as part of the robustness analysis to test if it is binding in Thai firms’ decision on investment.
Additionally, interest coverage ratio—as a factor affecting balance sheet—is also tested for its explanatory power, but does not turn to be a significant factor in our sample.
For the degree of Thai ownership, we tried using a continuous variable reflecting the actual percentage of ownership. For the size of the firm in addition to market capitalization, we tried a proxy asset size. None of them changes our main results.
Exact variable descriptions and sector descriptive statistics are in the appendix.
We tested for a potential two-way direction of causality between firm-specific variables and the dependent variable. The tests strongly rejected the hypothesis of causality in both directions for all firm-specific variables in the system.
For the sudden stop dummy variable we tried identifying those periods of negative capital inflows (after 1997 quarter 1) vs. just 1997 and 1998, as the current sudden stop dummy depicts. Both yield similar results.
Note that Aguiar (2004) considers firm-level exports/sales while our data is at the sectoral level.
Another important investment relationship is the one with “uncertainty.” Uncertainty as measured by standard deviation of monthly growth in equity price was also tested. Both current and lagged values were incorporated. Results reiterate the importance of profitability in tranquil time, and debt maturity structure during sudden stop period, though slightly smaller magnitude than that with the benchmark specification. We left the variable out of the benchmark equation because of the limited data availability.
Additionally, interest coverage ratio—as a factor affecting balance sheet—is also tested for its explanatory power, but does not turn out to be a significant factor in our sample.
Note that the sample size is reduced significantly to have only 413 observations.
Lending by BIS-reporting banks to the Thai private sector reached a peak of approximately US$40 billion during the second quarter of 1996 and then declined without recovering, but stabilized at US$15 billion.
There is, however, a slight increase in the magnitude of significant coefficients in the regression, which uses BIS lending as an interactive variable.
A decline of approximately 30 percent.