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.
