Working Paper: NBER ID: w17518
Authors: Todd A. Gormley; Simon Johnson; Changyong Rhee
Abstract: Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea's 1997-99 crisis, suggests an answer: No. Despite a general "no bailout" policy during the crisis, the largest Korean corporate groups (chaebol) - facing severe financial and governance problems - could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests "too big to fail" beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected.
Keywords: Too Big to Fail; Government Bailouts; Investor Perceptions; Chaebols; Korean Financial Crisis
JEL Codes: E44; G18; G21; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government promises of no bailouts (G28) | Investor perceptions of too big to fail (G28) |
| Chaebol affiliation (L22) | Access to bond financing (H74) |
| Corporate governance measures (G38) | Bond financing outcomes (H74) |
| Investor perceptions of safety (G24) | Bond financing outcomes (H74) |
| Chaebol affiliation (L22) | Yield to maturity (YTM) on bonds (E43) |