Corporate bankruptcies and official bail-outs: A cost-benefit analysis

Aydin Ozkan, Turalay Kenc, F. Gulcin Ozkan

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

The existence of government guarantees to bail out investors and the use of official support to prevent corporate bankruptcies are commonly viewed to have largely contributed to the financial fragilities of many emerging market economies during the 1990s. This paper attempts to rationalize the existence and the duration of such policies. By using a simple model of the economy, we formalize governments' decision on how long to provide resources to bridge the gap between the corporate sector's earnings and obligations. By considering both the costs and benefits of bail-outs in an environment where there are unfavorable productivity shocks, we show that the bail-out policy ends sooner; the higher the initial level of foreign borrowing, the lower the productivity, the lower the rate of time preference, and the higher the world interest rate. We also show that given any set of fundamentals, an unfavorable shift in market sentiments may end such policies sooner than otherwise.

LanguageEnglish
Pages437-453
Number of pages17
JournalJournal of International Financial Markets, Institutions and Money
Volume15
Issue number5
DOIs
Publication statusPublished - 1 Dec 2005
Externally publishedYes

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Bailouts
Cost-benefit analysis
Bailout
Borrowing
Productivity shocks
Business sector
Resources
Obligation
Costs and benefits
Financial fragility
Time preference
Interest rates
Emerging market economies
Productivity
Government guarantees
Market sentiment
Investors
Government

Cite this

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Corporate bankruptcies and official bail-outs : A cost-benefit analysis. / Ozkan, Aydin; Kenc, Turalay; Ozkan, F. Gulcin.

In: Journal of International Financial Markets, Institutions and Money, Vol. 15, No. 5, 01.12.2005, p. 437-453.

Research output: Contribution to journalArticle

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