ABSTRACT
Korean firms, especially large corporations, dramatically changed their management style immediately after the foreign exchange crisis that swept through most of the East Asian region around 1997. Before the crisis, management’s first priority was asset growth often backed by heavy debt. Since banks were effectively controlled by the government and served as a vehicle to implement government-led economic development plans, large firms cooperating with the government’s economic projects enjoyed very low-cost bank loans. Debt financing was almost free of bankruptcy costs for them. After the crisis, however, they started raising money directly through the capital market, both domestic and foreign. This sudden change was mainly prompted by the Korean economy’s abrupt exposure to the global financial system through its joining of the OECD in 1996. Korean banks could no longer give out loans to their corporate customers beyond what the BIS (Bank of International Settlement) rule allowed (i.e. the ratio of equity to risk-weighted assets should be more than 0.08), and Korean firms were no longer capable of raising debt without running a high bankruptcy risk. Two major changes in the business sector have followed this compliance with the global standards of the banking sector.
