The Effect of Internal Capital Markets on Corporate Investment: Evidence from the Asian Financial Crisis
43 Pages Posted: 15 Mar 2012
Date Written: March 14, 2012
This paper provides new evidence on the relationship between internal capital markets and corporate investment by exploiting an exogenous event and an unique empirical setting. We do so by comparing the investment behavior of Korean business group (chaebol) firms with non-chaebol Korean firms in the aftermath of the 1997 Asian financial crisis. Our empirical methodology employs a difference-in-differences matching estimator to ensure that chaebol and non-chaebol firms in the control group are as similar as possible along observable dimensions other than chaebol membership. The matching estimator also accounts for time-invariant, firm-specific effects. In addition, we conduct a battery of placebo and other related tests to evaluate alternative explanations that rely on endogenous selection of firms into chaebol, and demand effects that may differentially affect chaebol and control firms following the crisis. The results show that chaebol firms invest significantly more than non-chaebol firms in the control group in the aftermath of the crisis. This difference in investment behavior does not hold for normal periods, including a recession year. Chaebol firm post-crisis investment is positively associated with variables that proxy for the availability of internal capital markets, including industry diversification within a chaebol and chaebol liquidity. Chaebol firms with greater investment opportunities increased investment the most in the aftermath of the crisis, a pattern that is not observed in the control group. Finally, we find that chaebol firm profitability increased relative to control firms in the years following the crisis. Overall, our results suggest that Korean chaebol were able to use their internal capital markets to mitigate negative effects of the Asian crisis on corporate investment.
Keywords: Business groups, chaebol, difference-in-differences matching estimator, family firms, capital reallocation
JEL Classification: G32, G34
Suggested Citation: Suggested Citation