Financial Liberalization and Corporate Investments: Evidence from Korean Firm Data

• Published in: Asian economic journal Vol. 18; no. 3; pp. 277 - 292
• Main Authors: Koo, Jaewoon, Shin, Sunwoo
• Format: Journal Article
• Language: English
• Published: PO Box 378, Carlton South Victoria 3053, Australia Blackwell Publishing Asia Pty Ltd 01-09-2004; Blackwell Publishing Ltd
• Subjects: Capital markets; cash flow; chaebol; Conglomerates; Economic theory; Foreign investment; investment; Korea; Liberalization; Studies; Trade liberalization; Korea
• ISSN: 1351-3958; 1467-8381
• DOI: 10.1111/j.1467-8381.2004.00193.x

This paper examines whether financial liberalization procedures introduced in Korea in the early 1990s succeeded in relaxing financing constraints on firms. Because external funds are more costly than internal funds in an imperfect capital market, corporate investments depend on the availability of internal funds. As financial liberalization mitigates constraints on firms, the sensitivity of investments to cash flow can be reduced. Using panel data on Korean firms, we found that cash‐flow effects on investment spending decreased drastically during the liberalization period. In particular, small, non‐chaebol and established firms that were severely constrained gained most from liberalization. Chaebol firms appeared to lose preferential access to credit after liberalization.