The Effect of the DIP on the Business Performances of Rehabilitated Corporates (in Korean)

It has been 10 years since implementation of the Debtor in Possession (DIP), under which in principle the original management becomes legal administrators under the Debtor Rehabilitation and Bankruptcy Act. While this institution prevents original management from being deprived of their management rights and thus helps the corporates to go through prompt rehabilitation procedures, there have been more than a few cases of abuse of the institution in order to obtain debt relief and maintain control over the corporates. Accordingly, opinions calling for improvement of the institution have been steadily raised, in academia, the National Assembly and the financial sector. Meanwhile, there have been a number of papers from the economics perspective on the effects of corporate governance on the business performances of normal firms. However, it is hard to find studies of such effects on the performances of rehabilitated corporates. This paper has therefore analyzed the effects on rehabilitated firms' business results of the DIP, which could be regarded as a form of corporate governance of them. To deal with the issue of endogeneity between corporate governance and firms' business performances, we have used propensity score analysis as our main analysis methodology. According to our analysis, opportunistic profit adjustment practices of corporations have declined under the DIP. However, the business performances of the corporates rehabilitated under the DIP have either worsened compared to those of firms without the DIP application or there have been no significant statistical differences between them. These results imply that corporates under the DIP have been unable to adjust their profits due to the court's control, but that their efforts to rehabilitate themselves have been insufficient. This result has the following implications. First, since the DIP was implemented, the number of firms that have applied for corporate rehabilitation has surged, but as there have been no remarkable improvements in the business performances of corporations under the DIP, such that it is necessary to make efforts to enhance the DIP from the overall standpoint of corporate restructuring. Second, from a more detailed perspective, in order to keep management's moral hazard in check, it is necessary to strengthen the function of the creditors committee as well as enhance the abilities of market participants including sovereign credit rating agencies and investment companies to monitor the debtors.