Corporate Valuation and the Resolution of Bank Insolvency in East Asia

We examine the valuation effect of a bank's insolvency on related industrial firms. Our sample includes 31 insolvent banks in Indonesia, Korea, and Thailand that serve as main creditors for 269 publicly traded companies. Our findings suggest that a bank relationship adds value to a firm, and that investor confidence in bank-related firms depends on investors' certainty in the continuity of the banking relationship. Announcement of a bank closure, preceding liquidation and resulting in a complete loss of ties with the main creditor, leads to discounts in the market value of related firms. Announcement of nationalization, preceding recapitalization and new management, is associated with short- and long-term positive abnormal performance of related firms. Announcement of a foreign sale is associated with initial value discounts, but longer-term market premiums as investors revise their expectations of the effect of foreign capital and expertise. The announcement of a domestic merger, which may continue the banking relationship but adds neither capital nor new management, has no consistent short- or long-term effect on market value. Significant cumulative returns for fifty days following our event date suggest that bank ownership has real effects on the performance of related firms above initial expectations. We also explore but do not find support for alternative explanations of our results.

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