Asian Crisis and the Expenditure - Earnings Relationship
Journal of International Finance and Economics, Vol. 9, No. 2, pp. 39-53, 2009
Posted: 5 Dec 2009
Date Written: 2009
In this paper the Asian crisis is examined at the firm level. The objective is to provide insight to the recent financial crisis which started near the end of 2008 and has spanned the US economy and most of major economies around the world. Specifically, the capital expenditure - profitability (earnings) relationship is examined in the firms of eleven Southeastern Asian countries before, during, and after the Asian crisis. Earnings lead to an increase in expenditure in Asian countries before, during, and after the crisis. This means that the profits of companies are used for investment purposes, regardless of the legal system of the country, or the level of financial market development. However, the relationship from expenditure to profitability exhibits very different characteristics. Asian countries governed by civil law seem to have firms generating profits following expenditure. On the other hand, there is no evidence which suggests that expenditure leads to positive profits in common law countries. This conclusion is much more pronounced post-Asian crisis. Corporate governance systems in civil law countries have responded faster to the Asian crisis than those in common law countries. This is not entirely surprising given the fact that structural corporate governance changes in common law countries must be implemented at numerous financial policy institutions of the country.
Keywords: Asian Crisis, Capital Expenditure, Profitability
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