'Too Big to Fail': Government Policy vs. Investor Perceptions
50 Pages Posted: 16 Mar 2006 Last revised: 30 Jun 2011
Date Written: December 23, 2009
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: Suggested Citation