Ending "too big to fail" government promises vs. investor perceptions

Download or read book Ending "too big to fail" government promises vs. investor perceptions written by Todd A. Gormley and published by . This book was released on 2011 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.