A flight to Q? Firm investment and financing in Korea before and after the 1997 financial crisis

Peter Rousseau and Jong Hun Kim

Journal of Banking & Finance, 2008, vol. 32, issue 7, 1416-1429

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.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:32:y:2008:i:7:p:1416-1429

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