Issues and remedies in Korean business restructuring

Abstract

Argues that increased insolvencies in Korean firms following the 1997 Asian financial crisis were due to low profitability and refers to relevant research on insolvency and failure prediction. Explains and discusses the private and legal types of restructuring open to Korean firms in trouble, pointing out that owners may use more than one type and thus cause losses and delays. Suggests that the courts should be able to determine whether firms require a composition or a corporate reorganization, develops a mathematical model to distinguish between them and tests it on 1997‐1998 data demonstrating a 70 per cent plus level of accuracy. Analyses the share price response to firm restructure and shows that differences depend on the financial condition of the firm: not the type of restructure. Calls for changes in the bankruptcy law to either unify the two types of legal restructure or to allow the courts to assign the type.