Corporate Bankruptcy in Korea: Only the Strong Survive?
Posted: 14 Mar 2001
We analyze whether the build-up of financial vulnerabilities led listed Korean companies to bankruptcy. We find that pre-crisis leverage is systematically high for both poor performing/slow growing firms and for profitable/fast-growing firms. Pre-crisis leverage raises the probability of bankruptcy, which is lower for firms: (1) relying more on (renegotiable) bank credit; (2) with less inter-firm debt; and (3) having higher interest coverage ratios. Finally, none of these liquidity variables helps predict bankruptcies for chaebol-firms, suggesting that liquidity constraints are more stringent for non-chaebol. Thus, in a systemic crisis it is not only the strong/healthy that survive.
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