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Bailout and Conglomeration

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Author Info
Se-Jik Kim (Korea Institute for International Economic Policy)
Abstract

This paper develops a model of business groups in emerging markets where banks do not have sufficient capability to accurately distinguish between good (or high productivity) and bad (or low productivity) borrower firms. However, the bank can observe whether each firm repays on the repayment day, infer the probability of bad firms among the defaulted, and use liquidation as a screening device to select its good firms. For stand-alone firms, the bank may find it optimal to liquidate all the defaulted, given that the chance of bad firms among the defaulted is large. In contrast, for business conglomerates, the optimal policy can be a full bailout since conglomeration, through cross debt payment guarantees, hinders the bank from obtaining information on the productivity of individual firms that is needed to sort out the firms to be liquidated. Expectation of such a bailout policy may encourage risk-averse firms to form a conglomerate to serve as an information-diluting that helps eliminate the risk of liquidation.

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File URL: http://www.eaber.org/intranet/documents/23/300/KIEP_Kim_02_3.PDF
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Publisher Info
Paper provided by East Asian Bureau of Economic Research in its series Finance Working Papers with number 300.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 83 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:eab:financ:300

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Related research
Keywords: emerging market; repay; liquidate; default; borrow; conglomerate; debt repayment guarantee;

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Find related papers by JEL classification:
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Se-Jik Kim, 2003. "Macro Effects of Corporate Restructuring in Japan," IMF Working Papers 03/203, International Monetary Fund. [Downloadable!]
  2. Eric Friedman & Simon Johnson & Todd Mitton, 2003. "Propping and Tunneling," NBER Working Papers 9949, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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