The effects of debt subsidies on corporate investment behavior

Mansoor Dailami and E. Han Kim

No 727, Policy Research Working Paper Series from The World Bank

Abstract: This paper argues that credit subsidies are ineffective in stimulating business investment in productive assets. Instead, they lead to an increase in corporate holdings of financial assets and real estate. For empirical verification, the investment patterns in a sample of 241 Korean corporations listed on the Korean Stock Exchange between 1984 and 1988 were examined. The authors found a significant positive relation between corporate speculative asset holding and access to subsidized loans. Their estimates indicate that without interest rate controls and other forms of subsidy, corporate holdings of speculative assets would have been one-seventh of observed levels. Moreover, most corporate real estate holdings appear to be unrelated to production activities. Little evidence is found that the Korean government's interest rate controls and credit allocation policy have accelerated expansion of corporate investment. If anything, the controls are partly to blame for the overheated Korean stock market during 1986-88.

Keywords: Economic Theory&Research; International Terrorism&Counterterrorism; Banks&Banking Reform; Environmental Economics&Policies; Municipal Financial Management (search for similar items in EconPapers)
Date: 1991-07-31
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Citations: View citations in EconPapers (1)

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