Ending "Too Big To Fail": Government Promises vs. Investor Perceptions / Todd A. Gormley, Simon Johnson, Changyong Rhee.

Format:

Book

Author/Creator:

Gormley, Todd A.

Contributor:

National Bureau of Economic Research.

Johnson, Simon.

Rhee, Changyong.

Series:

Working Paper Series (National Bureau of Economic Research) no. w17518.

NBER working paper series no. w17518

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2011.

Summary:

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea's 1997-99 crisis, suggests an answer: No. Despite a general "no bailout" policy during the crisis, the largest Korean corporate groups (chaebol) - facing severe financial and governance problems - could still borrow heavily from households through issuing bonds at prices implying very low expected default risk. The evidence suggests "too big to fail" beliefs were not eliminated by government promises, presumably because investors believed that this policy was not time consistent. Subsequent government handling of potential and actual defaults by Daewoo and Hyundai confirmed the market view that creditors would be protected.

Notes:

Print version record

October 2011.