The impact of foreign liabilities on small firms: Firm-level evidence from the Korean crisis

Using Korean firm-level data on publicly-listed and privately-held firms together with firm exit data, we find strong evidence that holdings of foreign-currency denominated debt negatively affected the economic performance of small firms during the 1997-98 crisis. The large exchange rate depreciation that occurred during the crisis resulted in a decline in net worth for firms with foreign-currency denominated debt on their balance sheets. Small firms with more short-term foreign debt were more likely to declare bankruptcy. Conditional on surviving the crisis, small firms that had more short-term foreign debt experienced larger declines in sales. The exit (bankruptcy) margin accounts for a large fraction of small firms' adjustment during the crisis.