Financialization and Stagnant Corporate Investment in Korea Since the Asian Financial Crisis

Abstract

The goal of this paper is to analyze the impact of financial and corporate sector restructuring programs on nonfinancial corporate fixed investment in Korea since the Asian Financial Crisis in the late 1990s. More specifically, the paper aims to examine the extent to which post-crisis policy-induced ‘financialization’ – increasing financial payments of nonfinancial corporations to financial markets and their excessive reliance on portfolio management – has negative impacts on real fixed investment of nonfinancial and manufacturing firms. Using both standard OLS and GMM econometric tests based on both macro (1976-2009) and firm level micro data (1Q2001-2Q2011), the paper finds that there has been statistically significant negative correlation between the measured financialization and nonfinancial and manufacturing corporate fixed investment in Korea. This observation raises important policy questions and provides a new angle through which we can critically evaluate the IMF’s austerity-oriented financial restructuring programs. From a theoretical point of view, this paper can also contribute to the existing body of Post Keynesian financialization and corporate finance literature that is broader in scope than New Keynesian partial emphasis on information asymmetry.

Keywords: financialization, corporate portfolio management, corporate investment, asymmetric information, circulating capital model, financial instability hypothesis, Ordinary Least Square (OLS), Generalized Method of Moment (GMM)

JEL Classification: G11, G15, G31