Finance Papers

Document Type

Journal Article

Date of this Version

2015

Publication Source

Review of Finance

Volume

19

Issue

2

Start Page

491

Last Page

518

DOI

10.1093/rof/rfu015

Abstract

Can a government credibly promise not to bailout firms whose failure would have major negative systemic consequences? Our analysis of Korea’s 1997–98 crisis suggests an answer: No. Despite a general “no bailout” policy during the crisis, the largest Korean corporate groups—facing severe financial and governance problems—could still borrow heavily from households by issuing bonds at prices implying very low expected default risk. The evidence suggests “too big to fail” beliefs were not eliminated by government promises because investors believed that this policy was not time consistent. Subsequent bailouts confirmed the market view that creditors would be protected.

Copyright/Permission Statement

This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record is available online at: http://dx.doi.org/10.1093/rof/rfu015.

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Date Posted: 27 November 2017

This document has been peer reviewed.