Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis

Abstract

This paper examines capital reallocation among firms in Korean business groups (chaebol) in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for investment and performance of chaebol firms. We show that chaebol transferred cash from low growth to high growth member firms after the crisis, using cross-firm equity investments. This capital reallocation allowed chaebol firms with greater investment opportunities to invest significantly more than control firms in the aftermath of the crisis. Chaebol firms with greater investment opportunities also showed higher profitability and lower declines in valuation than control firms following the Asian crisis. Our results suggest that Korean chaebol used their internal capital markets to mitigate the negative effects of the Asian crisis on their investment and performance.

Keywords: Chaebol, corporate investment, difference-in-differences matching estimator, family firms, capital reallocation

JEL Classification: G32, G34