The Paper shows why and how the excessive use of commercial paper by financial institutions and corporations contributed to the vulnerability of the Korean economy to external shocks. We review the unfolding process of the Korean currency crisis,focusing on the role of the commercial paper. We examine how the excessive utilization of commercial paper led to bad credit equilibria in both financial and corporate sectors. We investigate the underlying institutional and market factors leading to the abnormal utilization of commercial paper before the Korean currency crisis erupted in November 1997. The factors identified are: interest rate differentials between the commercial and merchant banking sectors; relatively lax regulation in the commercial paper market; corporations' preference of debt financing over equity financing due to the concerns of ownership, tax subsidies and sluggish equity market; and equity market; and lack of good credit rating agencies.
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Paper provided by EconWPA in its series Finance with number
0503012.
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