Disappearing Internal Capital Markets: Evidence from Diversified Business Groups in Korea

37 Pages Posted: 1 Feb 2008 Last revised: 27 Aug 2008

See all articles by Sangwoo Lee

Sangwoo Lee

University of Illinois at Urbana-Champaign - Department of Finance

Kwangwoo Park

KAIST (Korea Advanced Institute of Science and Technology) - College of Business

Hyun-Han Shin

Yonsei University

Date Written: August 1, 2008

Abstract

This paper examines how the onset of a financial crisis affects the operation of internal capital markets among firms within a diversified business group. We find that active internal capital markets within Korean business groups (chaebols) attenuated the financial constraints of the group-affiliated firms, allowing them to make efficient capital allocations during the early 1990s. However, these markets are barely functioning after the financial crisis of 1997. Instead, we observe public debt markets serving as a substitute for internal capital markets. Our results suggest that chaebol firms' coordinated attempts to achieve healthier financial structures in the wake of the crisis have taken place at the expense of investment efficiency.

Keywords: Internal capital market, Korean chaebol, Financial crisis

JEL Classification: G31

Suggested Citation

Lee, Sangwoo and Park, Kwangwoo and Shin, Hyun-Han, Disappearing Internal Capital Markets: Evidence from Diversified Business Groups in Korea (August 1, 2008). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1081244 or http://dx.doi.org/10.2139/ssrn.1081244

Sangwoo Lee

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Kwangwoo Park (Contact Author)

KAIST (Korea Advanced Institute of Science and Technology) - College of Business ( email )

85 Hoegiro
Seoul 02455
Korea, Republic of (South Korea)
82-2-958-3540 (Phone)
82-2-958-3604 (Fax)

Hyun-Han Shin

Yonsei University ( email )

50 Yonsei Ro
Seodaemoon Gu
Seoul
Korea, Republic of (South Korea)
82-2-21235466 (Phone)

HOME PAGE: http://https://ysb.yonsei.ac.kr/faculty.asp?mid=n02&sOpt=&uid=32

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