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Firm diversification and equilibrium risk pooling: The Korean financial crisis as a natural experiment

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  • Masson, Robert
  • Tookes, Heather
  • Um, Taejong
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    Abstract

    We use the Korean Financial Crisis as a natural laboratory for examining interactions among firm diversification, equilibrium capital structure and tail probability events. When the crisis hit in 1997, several major firms, including a large number of highly leveraged conglomerates (Chaebols), experienced bankruptcies. We show how diversified Chaebols obtain higher equilibrium leverage than non-Chaebols (a "cosigner effect"). In the event of a low probability macro-economic shock, the model predicts a systematic change in relative bankruptcy risks of Chaebol firms. To examine this implication, we introduce an empirical methodology that decomposes equilibrium debt into demand, supply and Chaebol-specific factors, for use in a bankruptcy prediction model. We find that the primary cause of Chaebol firm bankruptcies was not idiosyncratic leverage, but leverage systematically related to greater equilibrium access to debt during normal times.

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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 10 (2009)
    Issue (Month): 1 (March)
    Pages: 1-22

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    Handle: RePEc:eee:ememar:v:10:y:2009:i:1:p:1-22

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    Web page: http://www.elsevier.com/locate/inca/620356

    Related research

    Keywords: Asian Financial Crisis Korean Chaebols Firm diversification Bankruptcy and credit provision;

    References

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