'Too Big to Fail': Government Policy vs. Investor Perceptions

50 Pages Posted: 16 Mar 2006 Last revised: 30 Jun 2011

Todd A. Gormley

Washington University in St. Louis

Simon Johnson

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

Changyong Rhee

Asian Development Bank

Date Written: 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.

Keywords: Financial Development, Institutions, Economic Crisis

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

Suggested Citation

Gormley, Todd A. and Johnson, Simon and Rhee, Changyong, 'Too Big to Fail': Government Policy vs. Investor Perceptions (December 23, 2009). Available at SSRN: https://ssrn.com/abstract=891258 or http://dx.doi.org/10.2139/ssrn.891258

Todd A. Gormley (Contact Author)

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
(314) 935-7171 (Phone)

HOME PAGE: http://www.gormley.info

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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