Corporate Reorganization and Revitalization in Asia Project


Fragility of corporate governance is cited as one of the causes of the Asian currency crisis. Based on joint studies of Thailand and Korea, this project analyzes the impact of corporate governance reform, particularly changes made in ownership and control in family businesses, on the revitalization of companies that failed during the currency crisis. Using this approach, this project seeks to reexamine the various problems of corporate governance in East Asia and derive lessons that may be applied to the restructuring of state-owned enterprises and reform of banks in China.

Key points

(1) Background

The main purpose of this project is to evaluate the efficiency of bankruptcy laws and regulations in Asian countries. Such evaluation has been until now conducted primarily with respect to U.S. companies. This is because the number of corporate failures in the United States sharply increased due to the slowdown of the U.S. economy from the latter half of the 1970s. Preceding studies are quite diverse, ranging from the measuring of direct and indirect bankruptcy costs (Weiss, 1990) and comparative analyses of bankruptcy and informal workout (Gilson, Kose and Lang, 1990; Gilson, 1997; Asquith, Gertner and Scharfstein, 1994; Franks and Torous, 1994; James, 1995, 1996) to examining the performance recovery of bankrupt companies subsequent to the completion of legal proceedings (Hotchkiss, 1995) and the role of debtor-in-possession (DIP) financing (Dahiya et al., 2003). Studies focusing on Japan include Eisenberg and Tagashira (1994) and Xu (2004a, b), while Thornburn (2000) addresses Swedish cases.

To date, there have been some attempts to assess the current status of bankruptcy proceedings in Asian countries. These include Claessens, Djankov and Klapper (2003) and Klapper and Claessens (2002). Both, by applying the law and finance approach of La Port (1998), attempt to relate the share of bankrupt companies among all companies to the characteristics of each country's legal system as seen in the authority of creditors, the priorities among secured creditors, and the legal system's origin. Also as an analysis of post-financial-crisis recovery, Claessens et al. (2001) briefly examined the performance of listed companies in Sweden and other European countries that have undergone a financial crisis, as well as in Asian countries hit by a currency crisis. Due to constraints in data availability, most studies on Asian countries have a limited scope of target companies, focusing only on major listed companies whose data can be obtained from such databases as Worldscope and Datastream. Almost no empirical studies exist concerning the measurement of direct bankruptcy costs (e.g. legal fees) and indirect bankruptcy costs (e.g. period costs incurred during legal proceedings), the assessment of the efficiency of court-administered corporate reorganizations, selection between workouts and court-administered proceedings, or determinants for post-management crisis recovery. And there seems to be no analysis of unlisted companies or SMEs.

(2) Research results for fiscal 2004

In response to these problems, RIETI organized an international workshop March 7-9, 2005, inviting collaborating researchers from five Asian countries to present their research results. In the course of discussion, contributors cited Indonesia's inefficiency of court-administered reorganization, and clarified the outcome of bankruptcy law reform in South Korea and its policy agendas for SME turnarounds. It was also suggested that the absence of efficient bankruptcy system reform has been hindering progress in bank disposal of bad loans in the Philippines and that the availability of DIP financing has a statistically significant positive effect on the post-management-crisis performance of companies in Thailand. Meanwhile, with respect to China, an economy in transition, it was shown that reorganization and liquidation of state-owned enterprises, which have been predominantly government-prescribed, are the primary cause of bad loans held by state-owned banks, whereby defects in China's corporate governance and legal system were illustrated in light of the problems seen in bankruptcy law reform.

(3) Research plans for fiscal 2005

Building on these findings of studies to date, we intend to focus on the recovery process of rehabilitated companies in proceeding with our joint research in fiscal 2005. Particularly, we expect comparative analysis of Japan and South Korea will produce significant results as the two countries have considerable institutional similarities as seen in handling of dishonored checks, laws for corporate reorganization and composition, and government-dictated workouts. We also seek to analyze corporate government reform and development of legal and regulatory system, particularly, those for corporate bankruptcy.

(1) China
- Actual state of corporate reorganizations under the existing bankruptcy code
- Revision of the bankruptcy law and its impact
- Restructuring of state-owned enterprises: bankruptcy, debt-equity swap (DES), merger and acquisition (M&A), management buyout (MBO), sale to foreign capitals

(2) South Korea
- Recovery of companies subjected to private reorganization amid the currency crisis
- M&A roles in dealing with corporate bankruptcies
- Implementation of the new integrated bankruptcy law

(3) Thailand
- Recovery of bankrupt companies in business performance and the role of DIP

Research results

* Research results of this project will be published, some in the form of a RIETI discussion paper or commission paper preliminary to a discussion paper.

Overview of the conference held on November 19, 2005

Participating members

  • Peng Xu (Faculty Fellow, RIETI / Professor, Hosei University)
  • Nobuyuki Isagawa (Associate Professor, Kobe University)
  • Akiko Kamesaka (Associate Professor, Aoyama Gakuin University)
  • Soichiro Kozuka (Professor, Sophia University)
  • Shoichi Tagashira (Professor, Sophia University)
  • Daisuke Tsuruta (Research Associate, National Graduate Institute for Policy Studies)
  • Sumio Hirose (Assistant Professor, Shinshu University)
  • Junsuke Matsuo (Professor, St. Andrew’s University)
  • Hiroshi Maruyama (Professor, Yokohama City University)
  • Fumiharu Mieno (Associate Professor, Kobe University)
  • Mariko Watanabe (Researcher, Institute of Developing Economies)
  • Hirohiko Nakahara (Counsellor Office, Civil Affairs Bureau, The Ministry of Justice)
  • Fumio Akiyoshi (Research Assistant, RIETI / Graduate School, The University of Tokyo)
  • Takuma Matsuda (Research Assistant, RIETI / Graduate School, The University of Tokyo)
  • Shumpei Yaoita (Research Assistant, RIETI / Associate Fellow, Graduate School of Policy and Studies, Chuo University)

Overseas Research Contributors

  • Li Shuguang (China: China University of Political Science and Law)
  • Chunlin Zhang (China: Beijing Office, World Bank)
  • Soogeun Oh (South Korea: Ewha Womans University)
  • Dongsoo Kang (South Korea: Korean Development Institute)
  • Pairoj Vongvipanond (Thailand: Institute for Social and Economic Studies, Dhurakijpundit University)
  • Nuttanan Wichitaksorn (Thailand: Institute for Social and Economic Studies, Dhurakijpundit University)