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Financial policy and corporate investment in imperfect capital markets : the case of Korea

Listed author(s):
  • Dailami, Mansoor

Central to the effectiveness of financial policies geared towards promoting real business investment is the interaction between corporations'financing and investment decisions. The objectives of this paper are twofold : 1) develop an integrated approach towards the problem of optimal corporate real investment and finance in the context of a financial model of a developing economy characterized by credit rationing, controlled banking sector and an organized equity market; and 2) apply the model to the nonfinancial corporate sector of the economy. The paper is organized as follows : Section I is the introduction; Section II describes the theoretical model of companies'optimal investment and financing behavior ( Tobin's Q approach ), but extended to incorporate some important tax and financial features of the economy; Section III discusses the estimation of the model, with annual data from 1963 to 1986; Section IV concludes with a brief discussion of some relevant policy implications and lessons.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 409.

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Date of creation: 30 Apr 1990
Handle: RePEc:wbk:wbrwps:409
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