Stock market reactions to banking industry restructuring: the Korean experience of 1997 and 1998

Abstract

This paper examines some of the market effects of the Korean bank restructuring measures that followed the IMF bai lout. 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 were not significantly influenced by the restructuring. However, shareholders of financially distressed banks suffered from significant losses, as much as if the bank had 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.