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Analysis of loan guarantees among the Korean Chaebol affiliates

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Author Info
Taeyoung Doh
Keunkwan Ryu

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Abstract

This paper analyses corporate loan guarantees among the Korean chaebol affiliates. Loan guarantees are found to be efficiency-neutral under a set of ideal conditions characterized by perfect and symmetric information, no agency problem, and no governmental interference in private financial contracts. In reality though, corporate loan guarantees have negative as well as positive effects. The negative effects of loan guarantees arise from the agency problem between the controlling minority shareholders and outside investors. Government's implicit support to financial institutions worsens the problem. Without such distortions, a loan guarantee by the guarantor firm may signal the quality of the investment project of the borrowing firm, if the guarantor firm has more information than the lending bank with regards to the type of the borrowing firm's investment project.

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Publisher Info
Article provided by Korean International Economic Association in its journal International Economic Journal.

Volume (Year): 18 (2004)
Issue (Month): 2 (June)
Pages: 161-178
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Handle: RePEc:taf:intecj:v:18:y:2004:i:2:p:161-178

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Related research
Keywords: Agency Problem; Chaebol; Controlling Minority Shareholder; Information Asymmetry; Loan Guarantee;

References listed on IDEAS
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  1. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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