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Institutions, Bailout Policies, and Bank Loan Contracting: Evidence from Korean Chaebols

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  • Raoul Minetti
  • Sung-Guan Yun

Abstract

In emerging economies, institutional and regulatory constraints can distort loan contracting and, hence, the incentives of lenders and borrowers. Studying the South Korean syndicated loan market, we find that during the 90s the safety net protecting business groups (chaebols)—especially the government’s bailout policy—affected the structure and pricing of loans to chaebol firms. However, after the chaebol reform of the late 90s dismantled the chaebol safety net, the differences in loan contracts between chaebol and non-chaebol firms narrowed or disappeared. The results suggest that the reform restored lenders’ incentives to monitor chaebol firms and properly assess their risk.

Suggested Citation

  • Raoul Minetti & Sung-Guan Yun, 2015. "Institutions, Bailout Policies, and Bank Loan Contracting: Evidence from Korean Chaebols," Review of Finance, European Finance Association, vol. 19(6), pages 2223-2275.
    • Handle: RePEc:oup:revfin:v:19:y:2015:i:6:p:2223-2275.
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    References listed on IDEAS

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    1. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
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    4. Sung Wook Joh & Ming Ming Chiu, 2004. "Loans to distressed firms: Political connections, Related lending, Business Group Affiliation and Bank Governance," Econometric Society 2004 Far Eastern Meetings 790, Econometric Society.
    5. Chang,Sea-Jin, 2003. "Financial Crisis and Transformation of Korean Business Groups," Cambridge Books, Cambridge University Press, number 9780521814355, January.
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    Cited by:

    1. Daniel Belton & Leonardo Gambacorta & Sotirios Kokas & Raoul Minetti, 2023. "Foreign Banks, Liquidity Shocks, and Credit Stability," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 12(1), pages 131-169.
    2. Philippe Aghion & Sergei Guriev & Kangchul Jo, 2021. "Chaebols and firm dynamics in Korea [Distance to frontier, selection, and economicgrowth]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(108), pages 593-626.
    3. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    4. Randall Morck & Bernard Yeung, 2017. "East Asian Financial and Economic Development," NBER Working Papers 23845, National Bureau of Economic Research, Inc.
    5. Hyun, Junghwan, 2021. "Trade credit, group affiliation, and credit contraction: Evidence from the 1997 Korean financial crisis," Economic Modelling, Elsevier, vol. 95(C), pages 203-214.

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