A flight to Q? Firm investment and financing in Korea before and after the 1997 financial crisis |
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Authors: | Peter L Rousseau Jong Hun Kim |
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Institution: | 1. Department of Economics, Vanderbilt University, P.O. Box 1819 Sta. B, Nashville, TN 37235, United States;2. National Bureau of Economic Research, Cambridge, MA 02138, United States;3. Department of Humanities and Social Sciences, Rose-Hulman Institute of Technology, CM 4008, Terre Haute, IN 47803, United States |
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Abstract: | We examine investment behavior among exchange-listed Korean manufacturing firms before and after the 1997 financial crisis using firm-level panel data. Starting with the standard Q-theory of investment, we augment it by allowing for a sales accelerator and the possibility of cash constraints, categorizing firms based on their age, size and affiliation to an industrial conglomerate (i.e., chaebol). We find that Tobin’s Q is a robust determinant of investment in a pooled sample for 1992–2001, but that it became more important for small firms and less important for chaebol-affiliated firms after the crisis. Investment by chaebol firms also became more sensitive to the availability of internal cash balances after the crisis. We interpret this as reflecting a shift in the Korean economy to a stronger market orientation after the crisis and to a business climate in which the quality of potential projects became more important relative to capital market imperfections in determining the destination of investment funds. |
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Keywords: | F3 G11 |
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