To Invest or Not To Invest: Effects of Poor Corporate Governance on Paper-Bill Spread during Asian Financial Crisis

East Asian financial crisis in 1997-1998 was catastrophic for many affected countries. Past studies (e.g. Greenspan (1998), Radelet & Sachs (2000)) had presented the cause of the crisis, which had a common ground that there was a loss of confidence by investors in affected Asian countries which led to increase of perceived risk and increased interest rates of Asian assets. Past studies, however, did not address exactly why investors lose confidence on Asian assets. Using two-period model of consumption-savings decision; firm’s balance sheet cost-benefit analysis; and risk and uncertainty model, the current study examines the impact of poor corporate governance and expected exchange rate on the perceived risk in investing in Asian assets which is embodied in the interest rate spread between firms’ commercial paper and United States Treasury Bill (paper-bill spread). The regression analyses using firm-level data in Indonesia, Korea, Malaysia, the Philippines and Thailand showed some evidence that corporate governance has significant impact on paper-bill spread