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Essays on the Effect of a Financial Crisis on the Productivity of Firms

  • Author(s): Kim, Bo Kyung
  • Advisor(s): Lieberman, Marvin B
  • et al.
Abstract

This dissertation investigates the effects of a financial crisis on the productivity of firms. It contains four separate studies. The first study conceptually reviews how the productivity of firms changes during a financial crisis. It introduces two conceptual effects of a financial crisis: (a) the effect that cleanses inefficient elements out of the economy; and (b) the effect that provides surviving firms with an opportunity of productivity improvement. This chapter further describes how the financial sector and governments may react during a financial crisis, and thus affect the productivity of the economy. The remainder of the dissertation empirically examines the effect of a financial crisis on the productivity of firms by investigating the 1997 Korean crisis.

The second study analyzes the effect of a financial crisis on the dispersion of productivity. Specifically, it examines whether there is a statistically-significant change in productivity dispersion between the pre- and post-crisis periods. To test whether the increase in dispersion is significant, the variance decomposition model is applied. Specifically, the measuring of variance decomposition at both the inter- and intra-industry levels allows us to investigate the change in variance within industries while controlling for the change in variance between industries, and vice versa. The results of this chapter empirically confirm that the increase in productivity variation between the pre- and post-crisis periods was statistically significant in the Korean crisis.

The third study investigates the effectiveness of the government-driven restructuring in the corporate sector. Restructuring of the corporate sector has been recognized as a key to recovery from financial crises. However, there is no general consensus in terms of how to best conduct corporate restructuring during a financial crisis. To measure the effectiveness of a government driven corporate restructuring process, the study investigates the ``workouts'' mandated by the government during the 1997 Korean crisis. Specifically, it draws upon a method of ``matching" to compare the firms that actually participated in the workout with the firms that did not go through such a workout, but which were otherwise similar to the participant firms. The study finds no statistical difference in terms of productivity improvement between the participant firms and non-participant firms.

The final study analyzes how business groups can improve their group productivity by restructuring their business portfolio in response to rare opportunities provided by a financial crisis. The overall group level productivity can be improved by four distinct activities of portfolio restructuring: (a) improving productivity of its individual affiliates; (b) acquiring productive businesses; (c) discarding unproductive affiliates; or (d) reallocating resources among affiliates to support the growth of higher performing affiliates. Employing the method of productivity decomposition, this study investigates how each of four activities of portfolio restructuring contributes to the change of group productivity.

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