The Effect of the Fast-Track Corporate Rehabilitation Program on the ICR of the Companies under Court Receivership (in Korean)

The limitation of the work-out system, revealed in the process of addressing insolvent companies, brings the necessity for markets to prepare the grounds of corporate restructuring. In addition, the role of the court in restructuring insolvent firms is emphasized. The court employes the Fast-Track corporate rehabilitation program for swift rehabilitation proceedings; and recently, the rehabilitation-specialized court has been set up, combining the advantages of work-out and legal management. Given the fact that a swift rehabilitation procedure is very critical due to the risk of the collapse of business foundation (e.g. falling asset value), this paper analyzes the effect of the Fast-Track program, introduced for a swift rehabilitation procedure. We use a Differences-in-Differences model, an econometric technique, to analyze and compare prior-and-post effects of policy implementation. The analysis result shows that the effect of this program on the ICR of the companies under court receivership is positive except enough statistical significance. Their business foundation has been undermined before and after court receivership and they have difficulties in securing funds due to bankruptcy stigma even after the termination of receivership, resulting in curbing the effect of the program. The same result is observed in the estimation by size and business (e.g. large companies, small and medium companies, and manufacturing). As for certain industries, subject to government restructuring, we do not find enough statistical significance in the analysis of Fast-Track effect, except for chemistry. In the case of chemistry, the Fast-Track program is helpful to increase the chances for rehabilitation owing to domestic companies' strong competitiveness. For steel and shipbuilding, however, the effect of Fast-Track seems to be not enough; their industrial competitiveness has been weakened, notably, in small and medium sized companies. This result has following implications. First, to improve the effect of Fast-Track, institutional efforts are required to reduce disadvantages induced by bankruptcy stigma (e.g. a fall in credit rating and high risk premiums). In particular, specific measures are needed for companies, graduating from court receivership, to do business as normal companies. Next, as observed in the empirical analysis of steel and shipbuilding, the effect of Fast-Track may not be exercised to the full with weakened industrial competitiveness. Therefore, restructuring efforts such as business reshuffle seem to be necessary. If these issues are resolved, the Fast-Track effect will be gradually improved, and consequently the Fast-Track program will be successfully settled.