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ASHOKA UNIVERSITY ECONOMICS
DISCUSSION PAPER NO. 41
Firm Indebtedness, Deleveraging and Exit: The Experience of
Slovenia During the Financial Crisis, 2008-2014*
October 2020
Biswajit Banerjee, Ashoka University
Jelena Ćirjaković, Bank of Slovenia
https://ashoka.edu.in/economics-discussionpapers
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Firm Indebtedness, Deleveraging and Exit: The Experience of Slovenia
During the Financial Crisis, 2008-2014
*
Biswajit Banerjee
†
and Jelena Ćirjaković
‡
Abstract
This paper examines the impact of the global financial crisis on firm exit and corporate
deleveraging in Slovenia during 2008‒2014 using firm-level data. Firms are classified according
to whether they increased their leverage, decreased their leverage or ceased operation during the
specified time interval, and the likelihood of being in these three states are estimated.
Deleveraging likelihood is analysed separately for total debt, business-to-business debt, bank
debt, and non-bank financial debt. This empirical exercise shows that the influence of covariates
on firm exit was different from that on deleveraging, and the impact on deleveraging differed
between different types of debt.
JEL Code: F65
Keywords: Firm indebtedness; Firm deleveraging; Firm exit; Financial crisis; Slovenia
*Earlier versions of this paper were presented at a conference on “Challenges for Debt Restructuring and
Financing of SMEs” jointly organized by the Bank of Slovenia and European Commission in Ljubljana in
September 2015, and at a seminar in Ashoka University, Sonepat, India in January 2017. Comments from
Conor O’Toole, Andreja Jaklič, William Greene, and the seminar participants contributed to substantial
strengthening of the paper. The views expressed in this paper are those of the authors and do not
necessarily represent the views of the institutions to which the authors are affiliated.
† Expert Advisor to the Governor, National Bank of Slovakia, Bratislava, Slovakia; Professor of
Economics, Ashoka University, Sonepat, Haryana, India; and Adjunct Senior Fellow, Research and
Information System for Developing Countries (RIS), New Delhi, India. Corresponding author. E-mail:
bisban50@gmail.com.
‡
Section Chief, Financial Stability and Macroprudential Policy Department, Bank of Slovenia, Ljubljana,
Slovenia. E-mail: jelena.cirjakovic@bsi.si
2
3
1 Introduction
It is well documented that corporate sector indebtedness increased substantially in a vast number
of countries across the world prior to the emergence of the global financial crisis in 2008 (see,
for example, European Central Bank, 2013; Garrote et al., 2013). The onset of the crisis resulted
in an abrupt reduction in availability of loanable funds in the wholesale market which had a
knock-on effect on the retail market and generated a feedback loop between deleveraging in the
financial and non-financial sectors. Heavily indebted distressed enterprises that were still viable
adjusted to the shocks through deleveraging and cutting back on their operations. At the same
time, a growing number of enterprises ceased operations and exited as the financial and demand
shocks rendered them unviable (Banerjee and Jesenko, 2014; Landini et al., 2015). In this paper,
we examine corporate deleveraging and firm exit in Slovenia during the period 2008-2014. We
study changes in leverage behaviour separately for total debt, business debt, bank debt and non-
bank financial debt. The explanatory variables that we consider are similar to those that have
been highlighted in the corporate finance literature on capital structure (see Frank and Goyal,
2008; and Graham and Leary, 2011).
The pace and extent of deleveraging in the period under consideration varied across countries
and sectors (European Central Bank, 2013; Cuerpo et al., 2015). The deleveraging process
triggered by the crisis was driven by a combination of demand and supply factors. The market
downturn, a general increase in uncertainty and risks reduced the ability of banks to evaluate the
creditworthiness of their clients properly. This, together with rising non-performing loans,
prompted banks to tighten lending standards through higher collateral requirements, stoppage of
the automatic renewal of loans and enhanced credit rationing.
1
Besides the forced deleveraging
on account of tighter supply-side conditions, enterprises also adjusted their investment plans and
capital structure on their own accord in view of the recession and an uncertain economic outlook.
1
Bank lending surveys in the eurozone show that credit conditions became more restrictive from 2008.
This survey is addressed to senior loan officers of a representative sample of eurozone banks and is
conducted four
times a year. Detailed information on the survey and its results
are available at
http://www.ecb.int/stats/money/surveys/lend/
html/index.en.html.
4
There were also heterogeneous developments and deleveraging across enterprises, reflecting a
process of creative destruction. Financing problems and uncertainty affected individual
enterprises with different degrees of intensity during the crisis. While unviable enterprises ceased
operations and exited, distressed but still viable ones deleveraged and cut back on their
operations. At the same time, many less-indebted enterprises increased their leverage and carried
out investment despite a worse macroeconomic outlook and an overall deleveraging trend by
firms. (European Central Bank, 2013; IMAD, 2014; Iqbal and Kume, 2014). In addition, new
firms continued to enter the market during the crisis, though at a slower pace than in the pre-
crisis period.
There is a growing literature on the impact of the crisis on corporate financing decisions and firm
exit.
2
The focus of these studies is on estimating the change in leverage and the survival rate of
enterprises, and examining how the influence of the various determinants of leverage and firm
exit changed during the crisis.
3
A proper understanding of the changing influence of these
determining factors is important in order to identify the vulnerabilities that arise from corporate
financing challenges, assess the macroeconomic consequences of the adjustment process,
ascertain possible drawbacks in policy following the onset of the crisis, and design appropriate
policy responses to contain the negative impact of the crisis.
4
Assessment of the effectiveness of
policy measures aimed at enhancing access to credit ought to take into consideration the
heterogeneity that exists among firms.
In this paper, we examine corporate deleveraging and firm exit in Slovenia during the period
2008-2014, using firm-level data maintained by the Agency for Public Legal Records and
Related Services (AJPES). The chosen time interval covers the period from the onset of the
financial crisis till the beginning of economic recovery in Slovenia. Unlike other studies
mentioned in footnote 2 and reviewed in Section 2, we do not estimate the determinants of the
level of or change in leverage. Instead, we categorize firms on the basis of whether they
increased their leverage, decreased their leverage or ceased operations during the specified time
2
See Section 2. Notable studies are Bole et al. (2014), Demirguc-Kunt et al. (2015), European Central
Bank (2013), Herwadkar (2017), Iqbal and Kume (2014), van Doornmalen (2013), Teixeira and
Pereira (2016) and Tripathy and Asija (2017).
3
The different ways in which earlier studies have examined the impact of the financial crisis on firm
leverage is noted in Section 2 below.
4
A conclusion of Bole et al. (2014) is that policy mistakes by bank regulators in Slovenia prolonged the
duration of the post-crisis credit crunch.