Risk Management of Business Groups: Capital Reallocations during a Financial Crisis

60 Pages Posted: 8 Dec 2017 Last revised: 23 Sep 2021

See all articles by Hwanki Brian Kim

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate

Jiyoon Lee

Yonsei University

Date Written: September 23, 2021

Abstract

Korean business groups, chaebol, reduced cash-flow volatility in the aftermath of the 1997 Asian financial crisis by reducing (increasing) investment in member firms with high (low) cash-flow volatility, which was accompanied by active capital reallocations through equity investments from high- to low-cash-flow-volatility member firms. Consequently, chaebol reduced aggregate cash-flow volatility to a greater extent than otherwise similar stand-alone firms. The negative cash-flow volatility--investment association was stronger amongchaebol with greater dependence on external financing or higher cross-member-firm variability in cash-flow volatility. Our results are consistent with internal capital markets being an effective means of risk management for chaebol in times of high external financing costs and robust to alternative explanations.

Keywords: Risk management, business group, capital reallocation, investment, financial crisis

JEL Classification: G30, G32

Suggested Citation

Kim, Hwanki Brian and Lee, Jiyoon, Risk Management of Business Groups: Capital Reallocations during a Financial Crisis (September 23, 2021). Available at SSRN: https://ssrn.com/abstract=3084281 or http://dx.doi.org/10.2139/ssrn.3084281

Hwanki Brian Kim

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Jiyoon Lee (Contact Author)

Yonsei University ( email )

Seoul
Korea, Republic of (South Korea)

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