Stock Market Reactions to Bank Industry Restructuring: The Korean Experience of 1997 and 1998

Abstract

This paper examines some of the effects on shareholder wealth of the Korean bank restructuring measures that followed the Korean IMF bailout. The Korean banks are divided into four groups to check for differences in market reactions to FSC restructuring mandates. We find that shareholders of healthy banks benefit when self-rescue or management improvement measures are implemented at distressed banks. Share prices of banks not directly involved in the restructuring process are not significantly influenced by the restructuring. However, shareholders of financially distressed banks suffered significant losses, as much as they would have incurred had the bank closed. Share prices of banks ordered to improve management were influenced as much as share prices of closed banks. We therefore conclude that financially weak banks were significantly affected by restructuring orders, while comparatively sound banks were not significantly influenced.