Combined Crises and Their Implications for Firm Profitability

Abstract

This paper investigates how the interaction of distinct types of macroeconomic crises impact on firm profitability. A new taxonomy of crises and combined crises is constructed, where up to four concomitant types of crisis are considered, viz., banking, currency, debt, and economic recession. There is ample evidence in the literature that the economic impact of twin'' crises, combining a currency and a banking crisis, affect companies' profitability differently from a currency or a debt crisis separately. Moreover these impacts were found to be deeper than the simple sum of those of single crises. We then estimate dynamic panel estimators of the main determinants of firm profitability by types of crisis combination, for emerging markets, and mature economies. Our results show that lagged profitability has a positive impact on firm profitability, irrespective of the macroeconomic conditions, or whether one or more crises are affecting the country. Leverage has a consistently negative impact on profitability, irrespective of the type of crisis. However, we found that the impact of other determinants, such as size, age, and dependence on external funding vary with the type of crisis. Firm size is a significant and positive determinant of profitability in the case a single currency crisis, but become insignificant in the case of a twin'' crisis, or of a combination of banking/currency/debt crisis.