Institutions, Bank Monitoring and the Structure of Credit Contracts: Evidence from Korean Chaebols Raoul Minetti, Michigan State University Sung-guan Yun, Central Bank of Korea This Version, September 2013 CEPR EBRD EBC Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking Minetti, Yun () Institutions, Monitoring, Chaebols This Version, September 2013 CEPR EBRD / 16
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Institutions, Bank Monitoring and the Structure of Credit ... · Bank monitoring and syndicated loan market (Su–, JF, 2007) Credit markets in emerging countries (Giannetti and Ongena,
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Institutions, Bank Monitoring and the Structure ofCredit Contracts: Evidence from Korean Chaebols
Raoul Minetti, Michigan State UniversitySung-guan Yun, Central Bank of Korea
This Version, September 2013CEPR �EBRD �EBC �Review of Finance Conference
Understanding Banks in Emerging MarketsExperimenting, Observing, or Asking
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 1
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Motivation
Primary activity �nancial institutions: monitor and discipline borrowers
Especially true in emerging economies (porous laws, ine¢ cient legalsystems hinder role of courts)
Do �nancial institutions have incentives to exert due diligence?
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 2
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The Empirical Setting
South Korean economy suitable empirical laboratory for above issues
Drastic reform corporate sector after 1997 �nancial crisis
Prior to crisis, government protected �rms a¢ liated to business groups,chaebols
Chaebols instrumental to government development policy
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 3
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The Empirical Setting (cont.)
Before crisis, chaebol �rms allegedly access to credit w/o close monitoring�nancial institutions. Banks mere renewal loans to chaebol �rms
Two institutional arrangements could depress banks�monitoring incentives
Safety net protected chaebols from failure risk:
government implicit bailout policy (especially, i) throughstate-controlled banks, ii) for top 5 chaebol �rms)
network cross-debt payment guarantees among chaebol subsidiaries
Dearth information on accounts further depressed banks�monitoring.Chaebol �rms no need report information to attract �nancing
Poor �nancial institutions�monitoring allegedly contributed to ine¢ cientinvestments chaebol �rms (before crisis, low productivity, rate of return)
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 4
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The Empirical Setting (cont.)
In response to 1997 crisis, government reformed corporate sector, chaebols
Removed safety net that protected chaebols. No longer bailoutguarantee; abolition debt guarantees among chaebol a¢ liates
Tougher rules corporate reorganizations, stringent time limits forreorganizations
Improvement accounting transparency. Chaebols requested to makeavailable combined �nancial statements a¢ liated �rms rather thanconsolidated �nancial statements; also, comply with internationalaccounting principles
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 5
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Related Literature
Corporate governance and �rm ine¢ ciencies. For Korea and South EastAsia, Baek, Kang and Park, JFE, 2004; Claessens, Djankov, Fan and Lang,JF, 2002; Lin, Ma, Malatesta and Xuan, JFE, 2012)
Bank monitoring and syndicated loan market (Su�, JF, 2007)
Credit markets in emerging countries (Giannetti and Ongena, RoF, 2009)
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 6
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Hypotheses
Chaebol �rms monitored less carefully; reform induced �nancial institutionsto monitor �rms more carefully
Syndicated loan granted by multiple banks. Lead arranger contacts otherlenders for co-�nancing
Lead arranger privileged position to monitor borrower. But monitoring notobservable by co-�nanciers ! need incentives to monitor
Lead arranger must retain strong interest in performance of borrower, thatis, large stake in loan (Holmstrom and Tirole, 1997)
Structure syndicated loan � loan share lead arranger(s) and concentrationof loan � conveys information monitoring incentives lenders
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 7
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Data
Syndicated loans crucial source �nancing in emerging economies, andAsia-Paci�c region
Hand-match detailed information on syndicated loans with information onchaebol �rms. Six data sources:
Loan Pricing Corporation�s DealScan database by Reuters;
KISLINE data providing system by Korea Information Services Inc.,major Korean credit rating company;
database on chaebol a¢ liation Korean Fair Trade Commission;
analysis chaebols by Lee (2005);
DART system, an electronic disclosure system run by the KoreanFinancial Supervision Service;
Compustat Global Financial Services �le.
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 8
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Baseline Results
Investigate impact of institutional arrangements of chaebols and of reformon structure syndicated loans
After controlling for battery of �rm and contract characteristics andfor aggregate e¤ects, concentration syndicated loans to chaebol �rmslower than that of loans to non-chaebol �rms.
After chaebol reform di¤erence in loan concentration narrowed.
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 9
Safety net formed by implicit bailout guarantee and by chaebol cross-debtguarantees, as well as dearth accounting information, reduced lenders�incentive to monitor chaebol �rms before crisis
When removed safety net, improved information on chaebols, �nancialinstitutions increased monitoring, started form more concentratedsyndicates to give lead arrangers stronger monitor incentives
Alternative test. In emerging economies, foreign banks tougher monitorsthan local banks. Better assessment techniques, less political pressure(Giannetti and Ongena, 2009).
Participation foreign lenders to arrangement of syndicated loans alternativemeasure creditors�monitoring intensity. Results analogous
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 10
Panel A. Chaebol Variable: Chaebol Leverage Panel B. Chaebol Variable: Chaebol Income Correlation
Table VII. Intra-Chaebol Effects
Bank Monitoring and Internal Governance
What agency problems can lenders�monitoring ameliorate?
Interplay between chaebol creditors and shareholders. In chaebol �rmswith poorer incentives for controlling shareholders, monitoring �nancialinstitutions stronger
When reform strengthened internal governance and accountabilityshareholders, e¤ect tended to vanish
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 14
Do institutions matter for role of credit market in monitoring �rms inemerging economies?
Evidence from Korea suggests �yes�
More work needed to understand interplay among creditors, institutionalinvestors and minority shareholders in providing proper incentives for ane¢ cient �rm management
Minetti, Yun () Institutions, Monitoring, ChaebolsThis Version, September 2013 CEPR � EBRD � EBC � Review of Finance Conference Understanding Banks in Emerging Markets Experimenting, Observing, or Asking 16