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Overborrowing and Overinvestment in East Asia: The Case of the Korean Firms

Author

Listed:
  • Jai-Won Ryou

    (Konkuk University)

  • Tae-Joon Kim

    (Dongduk Women's University)

Abstract

This paper examines whether there has been overinvestment by Korean firms in the 1990s, particularly during the few years leading up to the crisis in Korea. Overinvestment is defined as the statistically significant discrepancy between the forecasted value from an econometric model of investment and the actual investment. Our analysis shows that overinvestment was found most frequently for chaebol firms. Moreover, it was most evident in a few industries showing viable exports in the 1990s, such as electronic and communication equipments, basic metals and transport equipments other than motor vehicles. However, capital account liberalization was not found critical in inducing overinvestment. Overinvestment by chaebols during 1994-1996 period indicates that loosening strict restrictions on lending in the financial sector to chaebols backfired. In this sense, the Korean crisis was caused by structural weaknesses in corporate and financial sectors.

Suggested Citation

  • Jai-Won Ryou & Tae-Joon Kim, 2003. "Overborrowing and Overinvestment in East Asia: The Case of the Korean Firms," Korean Economic Review, Korean Economic Association, vol. 19, pages 327-346.
    • Handle: RePEc:kea:keappr:ker-200312-19-2-07
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    File URL: http://keapaper.kea.ne.kr/RePEc/kea/keappr/KER-200312-19-2-07.pdf
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    Citations

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    Cited by:

    1. Qiankun Meng & Yupei Liu & Wei’an Li & Mingshan Yu, 2023. "Bonding or Indulgence? The Role of Overborrowing on Firms’ Innovation: Evidence from China," Sustainability, MDPI, vol. 15(2), pages 1-23, January.
    2. Pedro Gete & Juan-Pedro Gómez, 2018. "Dealing with Overleverage: Restricting Leverage vs. Restricting Variable Compensation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 8(01), pages 1-29, March.

    More about this item

    Keywords

    Overborrowing; Overinvestment; Currency Crisis;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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