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The Very Dark Side of Internal Capital Markets: Evidence from Diversified Business Groups in Korea

  • Lee, Sangwoo
  • Park, Kwangwoo
  • Shin, Hyun-Han
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    This paper examines the capital allocation within Korean chaebol firms during the period from 1991 to 2000. We find strong evidence that, during the pre-Asian financial crisis period in the early 1990's, poorly performing firms with less investment opportunities invest more than well-performing firms with better growth opportunities. We also find the evidence of cross-subsidization among firms in the same chaebol group during the pre-crisis period. It appears that the existence of the "dark" side of internal capital markets explains most part of this striking phenomenon where "tunneling" practice has been common during the pre-crisis period. However, the inefficient capital allocation seems to disappear after the crisis as banks gain more power and market disciplines inefficient chaebol firms.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13497/1/wp2005-7a.pdf
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    Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2005-7.

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    Length: 39 p.
    Date of creation: Oct 2005
    Date of revision:
    Handle: RePEc:hit:hitcei:2005-7
    Note: This Version: May 8, 2005
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    1. Kim, Kevin Y. & Park, Kwangwoo & Ratti, Ronald A. & Shin, Hyun-Han, 2004. "Do Main Banks Extract Rents from Their Client Firms? Evidence from Korean Chaebol," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 45(1), pages 15-45, June.
    2. Ramon Moreno, 1998. "What caused East Asia's financial crisis?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug7.
    3. Ferris, Stephen P. & Kim, Kenneth A. & Kitsabunnarat, Pattanaporn, 2003. "The costs (and benefits?) of diversified business groups: The case of Korean chaebols," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 251-273, February.
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