Corporate leverage in EMEs: did the global financial crisis change the determinants?

BIS Working Papers  |  No 681  | 
14 December 2017



This paper looks at whether the determinants of corporate leverage in Emerging Market Economies (EMEs) changed after the Global Financial Crisis (GFC). In particular, the role played by global factors in driving leverage in EMEs is examined.


Earlier studies stressed the role played by domestic macroeconomic and firm-specific factors in determining corporate leverage. We evaluate the changing nature of these domestic factors post-GFC, using, in particular, a domestic financial conditions indicator (FCI) for each EME as a determinant of leverage. In addition, we explore the role of global factors in the build-up of leverage.


Our findings suggest that global financial spillovers significantly affected EMEs through corporate leverage. Indeed, we find that post-GFC global macroeconomic conditions, as proxied by the growth of global GDP and the Fed shadow rate, contributed significantly to the sharp rise of leverage in EMEs.

Employing panel GMM and quantile analysis, we find that large but less profitable firms build-up more leverage post-GFC. This suggests that the prolonged period of abundant global liquidity post-GFC resulted in looser credit evaluation, thus favouring less profitable firms. The results of quantile regression suggest that firms in the lowest quantile increased their leverage the most in the post-GFC period. As the policy rate cycle turns in advanced economies and EMEs, corporate deleveraging may become a more urgent necessity. The challenge for policymakers will be to ensure resilience of their financial sectors to such deleveraging.



This paper evaluates whether the GFC was instrumental in changing the determinants of corporate leverage in EMEs. This issue is addressed using a panel-GMM framework and quantile analysis with a database comprising more than 2,000 firms in 10 EMEs over a 19-year period. We find that, post-GFC, global financial market and macroeconomic conditions facilitated build-up of corporate leverage. Specifically, global factors, such as the growth of world GDP and the FED shadow rate, have assumed centre stage as determinants of leverage in EMEs. At the same time, some traditional drivers, such as domestic growth and firm-specific factors, have become less important.

JEL classification: G30, G32

Keywords: dynamic capital structure, corporate leverage, emerging market economies, global financial crisis