×
While writing the last post, I ran across an interesting paper published by Simon Johnson, Todd Gorley, and Changyong Rhee. "Do Crises Weaken Vested Interests? The Illustrative Case of Korean Corporate Bonds," looks at the Korean financial crisis and the mix of firms that secured access to the bond markets amidst the chaos. The authors were looking to see whether the crisis diminished the capacity of major firms to muscle to the front of the line. It didn't:
Using a unique dataset of publicly placed corporate bonds in Korea, this paper assesses a bond market's ability to provide financing during a severe bank crisis. Evidence from Korea after the 1997-98 crisis confirms that bond markets can develop quickly in bank-dominated economies. However, access was feasible only for the largest firms and, as with bank loans before the crisis, bonds were not allocated well. Large firms with weaker pre-crisis corporate governance were no less likely to obtain bond financing, and default risk was not priced by investors. This evidence suggests that while bond markets can develop quickly in a crisis-hit, bank-dominated economy, they may fail to allocate resources well in the absence of reliable credit rating agencies and when 'too large to fail' beliefs persist among investors. In terms of access to capital during the crisis, the largest firms did best and the financial playing field tilted further in their direction.Depressing -- but unsurprising -- stuff. Full paper here.
