Bailout terms that would otherwise be acceptable may be refused due to the stigma.
The second chapter is motivated by a situation in which when a firm is financially distressed, it is uncertain whether the distress stems from an unfolding economic crisis or excessive risk-taking by the firm.
I analyze how these uncertainties as well as a government's desire to control future moral hazard influence a bailout decision.
If the private signal increases the government's inclination to bailout, the government may have an incentive to lie and send the opposite message, thereby preserving market discipline.
However, the firm rationally infers this strategic disclosure, and therefore, may assume excessive risk taking no matter what messages does it receive from the government.
This dissertation consists of three essays on financial economics.
In the first chapter, jointly written with Yeon-Koo Che and Chongwoo Choe, we focus on observations during the recent financial crisis that financially distressed firms may be reluctant to accept government bailouts for fear that it may signal the weakness of their balance sheets and inhibit future financing.
Consequently, an informative equilibrium may worsen moral hazard compared to the babbling equilibrium.
In the late 2000s, the World suffered from a big global economic crisis which caused “the largest and sharpest drop in global economic activity of the modern era”, in which “most major developed economies find themselves in a deep recession”, according to Mc Kibbin and Stoeckel (1).
Because its consequences have a very big impact to the whole world, many economists and scientist have tried to find the causes of the crisis; and some major causes have been emphasized are greed, the defection of the free market system, and the lack of prudent regulation and supervision.
This essay will focus on the global imbalances, one of the most important causes of the current economic crisis.