Bailout and Conglomeration

29 Pages Posted: 15 Feb 2006  

Se-Jik Kim

International Monetary Fund (IMF)

Date Written: August 1999

Abstract

The paper suggests that when firms differ stochastically in their productivity, a bank may find it optimal not to bail out the failed nonconglomerate firms at all, but to bail out conglomerates fully. Expectation of such bailout policy may encourage risk-averse firms to join a conglomerate to minimize the risk of liquidation. Furthermore, in case of private information, bad firms follow good firms` decision on conglomeration to hide their type. Finally, the paper discusses the impact of conglomeration on the debt-equity ratio and the expansion of existing conglomerates through mergers and acquisitions.

Keywords: bailout liquidation conglomerates

JEL Classification: G33 L22

Suggested Citation

Kim, Se-Jik, Bailout and Conglomeration (August 1999). IMF Working Paper, Vol. , pp. 1-29, 1999. Available at SSRN: https://ssrn.com/abstract=880635

Se-Jik Kim (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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