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Ending "too big to fail" : Government promises vs. investor perceptions

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  • Ending "too big to fail"
  • Gormley, Todd A.; Johnson, Simon; Rhee, Changyong
  • National Bureau of Economic Research


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Title Ending "too big to fail"
Similar Titles
Sub Title

Government promises vs. investor perceptions

Material Type Reports
Author(English)

Gormley, Todd A.; Johnson, Simon; Rhee, Changyong

Publisher

Cambridge:National Bureau of Economic Research

Date 2011-10
Series Title; No NBER Working Paper Series / 17518
Pages 56
Subject Country South Korea(Asia and Pacific)
Language English
File Type Link
Original Format pdf
Subject Industry and Technology < Entrepreneurship
Holding National Bureau of Economic Research

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.