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Recovery From A Financial Crisis In South Korea

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The financial crisis in South Korea was worsened by the wave of bankruptcies that occurred in the corporate sector of South Korea. 1 In spite of the fact that the cause for financial crisis in South East Asia was common for most of the countries, the observers could not agree upon some specific reasons pertaining to the development of Korean economy and especially the level of leverage in the corporate sector of the economy of South Korea. For instance, according to the research of Paola Bongini and Giovanni Ferri, the leverage in the pre-crisis period was high both for profitable companies and poor performing, less profitable ones. Thus one could not assume that the leverage had been caused by the ingrained inefficiency of the corporations. moreover, the results of their research showed that the companies were leveraged because of the high growth. thus the authors concluded that direct relationship between the growth rate of the company and the level of leverage was present.2 The second question that the authors addressed was the role that the level of the leverage plaid in the bankruptcies of several corporations in South Korea.
The results obtained by the researchers confirmed the hypothesis that reliance on the banking financing could decrease the probability of bankruptcy whereas the reliance on intermediated credit might increase the possibility of bankruptcy. these results were explained by the fact that bank credits in contrast to the intermediated were more negotiable ones. 3 The findings also showed that there was a correlation between the interest coverage ratios and the probability of the bankruptcy. Companies with low-interest coverage ratios had a higher probability of the bankruptcy and visa versa as low-interest coverage ratio might indicate the vulnerability of the company that could be worsened by the unexpected sharp increase in the interest rate.