The Effect of a Financial Crisis on Market Structure: The Asian Financial Crisis

The Effect of Financial Crisis on Market Structure: Evidence from the Asian Financial Crisis                This paper studies the relative impact of the efficiency and financial resources of a firm on survival over a financial crisis and how survival based on these criteria affect post-crisis market structure. Previous studies of industry evolution focus on productivity as a sorting mechanism between survivors and those firms that exit an industry over time. This mechanism, however,  may not be sufficient to explain changes in market structure resulting from a financial crisis.                During periods of financial crisis, information asymmetries are exacerbated and firms that may have received funding prior to the crisis based on efficiency criteria may no longer have as much access to liquidity. This paper examines whether efficiency or access to liquidity play a more important role in survival, and how this change in sorting criteria will affect within industry productivity. If indeed liquidity is more important, firms with less access to liquidity are less likely to survive. The resulting effect on market structure may be that more productive firms exit, impairing productivity growth after a crisis.                To address these  questions, a data set of the census of manufacturing firms in Indonesia over the years 1993-2001 is utilized. Using a hazard model, this paper analyzes the survival of manufacturing firms as a function of their economic efficiency and financial resources over this time period. The relative effects of productivity will be measured using total factor productivity estimated from the Levinsohn-Petrin estimator. Firms may receive access to liquidity from several sources other than the constrained banking sector. For instance, government owned firms may be provided with bailout funds. Thus, the share of plant investment funded by non-bank sources will be used to measure access to liquidity while several other proxies for liquidity such as real estate holdings will be used to measure collaterizeable wealth. The expected result is that access to liquidity is more important to survival than efficiency, and the more efficient firms are in fact more likely to exit.                In addition to examining the effects of access to liquidity on firm survival,  this paper analyzes the within-industry productivity changes associated with the exit of the more productive firms. A productivity decomposition both prior to  and over the crisis will be conducted. This will separate the changes resulting from real productivity effects versus reallocative effects (those associated with entry and exit) both prior to and over the crisis to determine how the exit of the more productive firms is affecting industry productivity evolution. Initial results indicate that productivity growth is decreasing after the crisis and relatively more due to the exit of more productive firms, rather than a decrease in real productivity. This has important policy implications in terms of access to bailout funding, namely that instead of focusing funds on firms failing from an efficiency perspective, the government should also consider the efficiency costs of neglecting the more productive firms.