Declining Fixed Investment and Increasing Financial Investment of Korean Corporations

27 Pages Posted: 10 Jan 2020

See all articles by Daehwan Kim

Daehwan Kim

Konkuk University

Sunhee Kwon

Daejin University, Department of Global Economics

Jai-Won Ryou

Konkuk University

Date Written: December 30, 2019

Abstract

This paper aims to determine factors causing the stagnation of Korean firms’ fixed investment after the global financial crisis, using panel data for the period of 1999-2016. Fixed investment remained sensitive to cash flow and Tobin’s q although their effects decreased after the global financial crisis. A decreasing trend of cash flow and an increase in Tobin’s q since the early 2000’s imply that the worsening cash flow was a major factor behind the sluggish investment after the crisis. Meanwhile, debt-equity ratio remained significant for non-chaebol affiliated firms, reflecting disparity in access to external financing. Volatility of stock returns also became insignificant after the crisis, casting doubt on the argument that uncertainty was a major factor contributing to the decline of fixed investment. Analysis of financial investment confirmed the significant effect of cash flow, larger than that on financial investment than on fixed investment. In particular, debt repayment and other financial investment, except share repurchase, were sensitive to cash flow. However, the substitution of fixed investment by financial investment is a consequence, rather than a cause of declining fixed investment.

Keywords: Stagnant Fixed Investment, Financial Investment, Cash Flow, Tobin’s q, Global Financial Crisis

JEL Classification: E22, G31, G32

Suggested Citation

Kim, Daehwan and Kwon, Sunhee and Ryou, Jai-Won, Declining Fixed Investment and Increasing Financial Investment of Korean Corporations (December 30, 2019). East Asian Economic Review Vol. 23, No. 4 (December 2019) 353-379, DOI: 10.11644/KIEP.EAER.2019.23.4.367, Available at SSRN: https://ssrn.com/abstract=3516510 or http://dx.doi.org/10.2139/ssrn.3516510

Daehwan Kim

Konkuk University ( email )

1 Hwayang-dong
Kwangjin-gu
Seoul, 143-701
Korea

Sunhee Kwon

Daejin University, Department of Global Economics ( email )

1007 HOGUK ROAD
POCHEON-SI, GYEONGGI-DO
Korea, Republic of (South Korea)

Jai-Won Ryou (Contact Author)

Konkuk University ( email )

1 Hwayang-dong
Kwangjin-gu
Seoul, 143-701
Korea
+82-2-450-3621 (Phone)

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