TY  - JOUR
AU  - Gormley,Todd A.
AU  - Johnson,Simon
AU  - Rhee,Changyong
TI  - Ending "Too Big To Fail": Government Promises vs. Investor Perceptions
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17518
PY  - 2011
Y2  - October 2011
UR  - http://www.nber.org/papers/w17518
L1  - http://www.nber.org/papers/w17518.pdf
N1  - Author contact info:
Todd Gormley
The Wharton School
University of Pennsylvania
3620 Locust Walk, Suite 2400
Philadelphia, PA 19104
Tel: 215-746-0496
E-Mail: tgormley@wharton.upenn.edu

Simon Johnson
MIT Sloan School of Management
100 Main Street, E52-562
Cambridge, MA 02142
Tel: 617/290-9618
Fax: 617/253-2660
E-Mail: sjohnson@mit.edu

Changyong Rhee
Economics and Research Department
Asian Development Bank
6 ADB Avenue, Mandaluyong City
1550 Philippines
E-Mail: crhee@adb.org
AB  - 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.
ER  -