Abstract
In emerging economies, institutional and regulatory constraints can distort loan contracting and, hence, the incentives of lenders and borrowers. Studying the South Korean syndicated loan market, we find that during the 90s the safety net protecting business groups (chaebols)—especially the government’s bailout policy—affected the structure and pricing of loans to chaebol firms. However, after the chaebol reform of the late 90s dismantled the chaebol safety net, the differences in loan contracts between chaebol and non-chaebol firms narrowed or disappeared. The results suggest that the reform restored lenders’ incentives to monitor chaebol firms and properly assess their risk.
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