The Effect of the Fast-Track Corporate Rehabilitation Program on the Interest Coverage Ratio of the Companies Under Court Receivership

Journal of Governance and Regulation, Volume 7, Issue 1, 2018, DOI:10.22495/jgr_v7_i1_p1

19 Pages Posted: 13 Feb 2018

See all articles by Young Jun Choi

Young Jun Choi

Economic Research Institute, The Bank of Korea

Date Written: January 30, 2018

Abstract

Given the fact that a swift rehabilitation procedure is very critical due to the risk of the collapse of business foundation (e.g. falling asset value), this paper analyzes the effect of the Fast-track program, introduced to address insolvent companies swiftly. A Differences-in-Differences model is used to analyze and compare the prior-and-post effects of the program. The analysis result shows that the effect of this program on ICR (interest coverage ratio), representing the degree of rehabilitation, is positive; but its statistical significance is low. This is because the business foundation has been undermined around the time of receivership; and even after the termination of the receivership, the program effect is limited due to the bankruptcy stigma. The same result is observed in estimations by company size and by industry. This result has following implications. First, to improve the effect of Fast-track, institutional efforts are required to reduce disadvantages induced by the bankruptcy stigma (e.g. a fall in credit rating and high-risk premiums). Next, as observed in the empirical analysis of steel and shipbuilding, the effect of the Fast-track may not be exercised to the full with weakened industrial competitiveness. Therefore, restructuring efforts such as business reshuffle are necessary.

Keywords: Corporate Restructuring, Court Receivership, Fast-Track Program, Bankruptcy Stigma, Differences-in-Differences Model

JEL Classification: G30, G34, G38

Suggested Citation

Choi, Young Jun, The Effect of the Fast-Track Corporate Rehabilitation Program on the Interest Coverage Ratio of the Companies Under Court Receivership (January 30, 2018). Journal of Governance and Regulation, Volume 7, Issue 1, 2018, DOI:10.22495/jgr_v7_i1_p1 , Available at SSRN: https://ssrn.com/abstract=3113674

Young Jun Choi (Contact Author)

Economic Research Institute, The Bank of Korea ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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