Corporate Balance Sheet Adjustment: Stylized Facts, Causes and Consequences

Using national account data, we define corporate balance sheet adjustment episodes as periods during which major increases in non-financial corporations’ net lending/ borrowing are experienced. An analysis of such episodes in Germany and Japan, and a more systematic exploration of a sample of 30 countries, show that corporate balance sheet adjustment tends to be long lasting and associated with significant effects on current accounts, wages and investment. Adjustment episodes lead to significant changes in corporate balance sheets ratios with a build-up of liquidity and a reduction of leverage. The adjustment is generally achieved by reducing investment and increasing savings on the back of a falling wage share. A panel econometric exercise shows that balance sheet adjustment periods are triggered by macroeconomic downturns as well as balance sheet stress due to high debt, low liquidity and negative equity price shocks.