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'Too Big to Fail': Government Policy vs. Investor PerceptionsTodd A. GormleyUniversity of Pennsylvania - The Wharton School Simon JohnsonMassachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER) Changyong RheeAsian Development Bank December 23, 2009 Abstract: Can a “no bailout” government policy eliminate investors’ perception that some firms are “too big to fail”? We analyze this question using evidence from the Korean crisis of 1997-98. Despite a “no bailout” policy of Korean government following the crisis, we find that the largest Korean corporate groups (chaebol) were able to retain access to external finance by borrowing directly from households through the bond market. Dubious corporate governance did not prevent firms from borrowing, and there is no evidence that default risk was priced by investors. This evidence suggests that “too big to fail” beliefs among investors are unlikely to be eliminated by government commitments to not bail out firms.
Number of Pages in PDF File: 50 Keywords: Financial Development, Institutions, Economic Crisis JEL Classification: E44, G18, K00, N20, P16, P17 working papers seriesDate posted: March 16, 2006 ; Last revised: June 30, 2011Suggested CitationContact Information
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