We analyse corporate balance sheet adjustment episodes in Germany and Japan as well as a sample of 30 countries using national account data. Corporate balance sheet adjustment tends to be long lasting and associated with strong effects on current accounts, investment and wages. Adjustment episodes lead to significant changes in corporate balance sheets ratios with a built-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 better understanding of corporate balance sheet adjustment processes is critical for understanding macroeconomic divergence within EMU.
We analyse corporate balance sheet adjustment episodes in Germany and Japan, as well as a sample of 30 countries, using national account data. 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.