Economics and Research Department
Asian Development Bank
6 ADB Avenue, Mandaluyong City
E-Mail: no email available
NBER Working Papers and Publications
|October 2011||Ending "Too Big To Fail": Government Promises vs. Investor Perceptions|
with Todd A. Gormley, Simon Johnson: 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.
Published: Ending “Too Big To Fail”: Government Promises Versus Investor Perceptions* Todd A. Gormley1, Simon Johnson2,3 and Changyong Rhee4 Review of Finance (2015) 19 (2): 491-518.