Abstract

http://ssrn.com/abstract=1364891
 
 

References (22)



 
 

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Ending 'To Big To Fail': Government Promises vs. Investor Perceptions


Todd A. Gormley


University of Pennsylvania - The Wharton School

Simon Johnson


Massachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER)

Changyong Rhee


Asian Development Bank

February 8, 2014

Review of Finance, Forthcoming
AFA 2010 Atlanta Meetings Paper

Abstract:     
Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997-98 crisis, suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups – facing severe financial and governance problems – could still borrow heavily from households by issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises because investors believed that this policy was not time consistent. Subsequent bailouts confirmed the market view that creditors would be protected.

Number of Pages in PDF File: 40

Keywords: Financial Development, Political Economy, Crisis

JEL Classification: E44, G18, K00, N20, P16, P17

working papers series





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Date posted: March 23, 2009 ; Last revised: June 17, 2014

Suggested Citation

Gormley, Todd A. and Johnson, Simon and Rhee, Changyong, Ending 'To Big To Fail': Government Promises vs. Investor Perceptions (February 8, 2014). Review of Finance, Forthcoming; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1364891 or http://dx.doi.org/10.2139/ssrn.1364891

Contact Information

Todd A. Gormley (Contact Author)
University of Pennsylvania - The Wharton School ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(314) 313-4330 (Phone)
HOME PAGE: http://apps.olin.wustl.edu/faculty/Gormley/

Simon Johnson
Massachusetts Institute of Technology (MIT) - Entrepreneurship Center ( email )
United States
617-253-8412 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Changyong Rhee
Asian Development Bank ( email )
6 ADB Avenue, Mandaluyong City 1550
Metro Manila
Philippines
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