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NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Todd Gormley

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October 2011Ending "Too Big To Fail": Government Promises vs. Investor Perceptions
with Simon Johnson, Changyong Rhee: w17518
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.

Todd A. Gormley, Simon Johnson, Changyong Rhee (2014), Ending "Too Big to Fail": Government Promises vs. Investor Perceptions, Review of Finance, forthcoming

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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