Financial Crisis in South Korea Essay Example | Topics and Well Written Essays - 1250 words

Financial Crisis in South Korea - Essay Example The financial crisis in South Korea was worsened by the wave of bankruptcies that occurred in the corporate sector of the South Korea. 1 In spite of the fact that the cause for financial crisis in South East Asia was common for most of the countries, the observers could not agree upon some specific reasons pertaining to the development of Korean economy and especially the level of leverage in the corporate sector of economy of the South Korea. For instance, according to the research of Paola Bongini and Giovanni Ferri, the leverage in pre crisis period was high both for profitable companies and poor performing, less profitable ones. Thus one could not assume that the leverage had been caused by the ingrained inefficiency of the corporations; moreover the results of their research showed that the companies were leveraged because of the high growth; thus the authors concluded that direct relationship between the growth rate of the company and the level of leverage was present.2 The sec ond question that authors addressed was the role that the level of the leverage plaid in the bankruptcies of several corporations in the South Korea. The results obtained by the researchers confirmed the hypothesis that reliance on the banking financing could decrease the probability of bankruptcy whereas the reliance on intermediated credit might increase the possibility of bankruptcy; these results were explained by the fact that bank credits in contrast to the intermediated were more negotiable ones. 3 The findings also showed that there was a correlation between the interest coverage ratios and the probability of the bankruptcy. Companies with low interest coverage ratios had higher probability of the bankruptcy and visa versa; as low interest coverage ratio might indicate the vulnerability of the company that could be worsened by the unexpected sharp increase in the interest rate. Trade credits as the experience of the South Korea showed may increase the possibility of the bankruptcy of the enterprises as trade creditors are less inclined to modify the credit conditions, thus those companies that relied on the trade credits were especially vulnerable. At the end of the nineties many economic researchers attempted to access the role of the huge enterprises plaid in the accumulation of the capital in national economy; most of the researchers agreed that large conglomerations created national capital, however there were some controversies surrounding the efficiency of the internal market capital. On the one hand such scientists as Stein claimed that internal capital market are more efficient than external ones as they decrease transition costs as well as provide better incentives in the process of credit allocation, whereas other researchers asserted that internal capital might reduce value-added process within the group as the managers of the conglomerate may be engrossed in the cross subsidizing process that could hamper the development of the company and would not add the value to the group; apart from this the companies- members of the conglomerate usually have less financial constraints than other companies in the market, that have to rely on their cash flows or on the credits from other financial institutions So the researchers came to the conclusion that leverage coupled with liquidity constraints was the most