Determinants of Corporate Bankruptcy: Evidence from Chaebol and Non-Chaebol Firms in Korea

Abstract

Using a panel dataset for the period of 1991–2001, the present paper explores the significant determinants that indicate the likelihood of bankruptcy for chaebol and non-chaebol firms in Korea, and identifies the differences in the determinants between the two types of firms, with an emphasis on their ownership and financial structures. Logit bankruptcy regressions show that largest shareholder ownership (i.e. ownership concentration) is likely to act as a corporate governance mechanism in reducing bankruptcy risk and that financial stability, operating experience and firm size are also important. In separate regressions for chaebol and non-chaebol firms, foreign ownership for chaebol firms and ownership concentration for non-chaebol firms emerge as significantly positive and negative bankruptcy determinants, respectively. In particular, bank ownership is identified as a positive factor for chaebol firms and a negative factor for non-chaebol firms. These outcomes suggest that ownership concentration and bank ownership are likely to play a monitoring role in lowering bankruptcy risk for non-chaebol firms. Outcomes from more elaborate estimations also suggest that overall, bank ownership enhances the monitoring role as a substitute for low foreign ownership.