Bailout and Conglomeration
International Monetary Fund (IMF)
IMF Working Paper No. 99/108
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.
Number of Pages in PDF File: 29
Keywords: bailout liquidation conglomerates
JEL Classification: G33 L22
Date posted: February 15, 2006