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A flight to Q? Firm investment and financing in Korea before and after the 1997 financial crisis

  • Rousseau, Peter L.
  • Kim, Jong Hun

We examine investment behavior among exchange-listed Korean manufacturing firms before and after the 1997 financial crisis using firm-level panel data. Starting with the standard Q-theory of investment, we augment it by allowing for a sales accelerator and the possibility of cash constraints, categorizing firms based on their age, size and affiliation to an industrial conglomerate (i.e., chaebol). We find that Tobin's Q is a robust determinant of investment in a pooled sample for 1992-2001, but that it became more important for small firms and less important for chaebol-affiliated firms after the crisis. Investment by chaebol firms also became more sensitive to the availability of internal cash balances after the crisis. We interpret this as reflecting a shift in the Korean economy to a stronger market orientation after the crisis and to a business climate in which the quality of potential projects became more important relative to capital market imperfections in determining the destination of investment funds.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 7 (July)
Pages: 1416-1429

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:7:p:1416-1429
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  1. Peter L. Rousseau & Jong Hun Kim, 2007. "Credit Markets and the Propagation of Korea's 1997 Financial Crisis," Southern Economic Journal, Southern Economic Association, vol. 74(2), pages 524-545, October.
  2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
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