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Bailout and Conglomeration

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  • Mr. Se-Jik Kim

Abstract

The paper suggests that when firms differ stochastically in their productivity, a bank may find it optimal not to bail out the failed nonconglomerate firms at all, but to bail out conglomerates fully. Expectation of such bailout policy may encourage risk-averse firms to join a conglomerate to minimize the risk of liquidation. Furthermore, in case of private information, bad firms follow good firms’ decision on conglomeration to hide their type. Finally, the paper discusses the impact of conglomeration on the debt-equity ratio and the expansion of existing conglomerates through mergers and acquisitions.

Suggested Citation

  • Mr. Se-Jik Kim, 1999. "Bailout and Conglomeration," IMF Working Papers 1999/108, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/108
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    Citations

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    Cited by:

    1. Feenstra, Robert C. & Huang, Deng-Shing & Hamilton, Gary G., 2003. "A market-power based model of business groups," Journal of Economic Behavior & Organization, Elsevier, vol. 51(4), pages 459-485, August.
    2. Johnson Simon, 2002. "Coase and the Reform of Securities Markets," International Economic Journal, Taylor & Francis Journals, vol. 16(1), pages 1-19.
    3. Simon Johnson & Andrei Shleifer, 2000. "Coase And Corporate Governance In Latin America," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 2(2), pages 113-131.

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