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The effects of debt subsidies on corporate investment behavior

  • Dailami, Mansoor
  • Kim, E. Han

This paper argues that credit subsidies are ineffective in stimulating business investment in productive assets. Instead, they lead to an increase in corporate holdings of financial assets and real estate. For empirical verification, the investment patterns in a sample of 241 Korean corporations listed on the Korean Stock Exchange between 1984 and 1988 were examined. The authors found a significant positive relation between corporate speculative asset holding and access to subsidized loans. Their estimates indicate that without interest rate controls and other forms of subsidy, corporate holdings of speculative assets would have been one-seventh of observed levels. Moreover, most corporate real estate holdings appear to be unrelated to production activities. Little evidence is found that the Korean government's interest rate controls and credit allocation policy have accelerated expansion of corporate investment. If anything, the controls are partly to blame for the overheated Korean stock market during 1986-88.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 727.

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Date of creation: 31 Jul 1991
Date of revision:
Handle: RePEc:wbk:wbrwps:727
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  1. William G. Gale, 1990. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 43-62 National Bureau of Economic Research, Inc.
  2. Joseph E. Stiglitz, 1991. "Government, Financial Markets, and Economic Development," NBER Working Papers 3669, National Bureau of Economic Research, Inc.
  3. William G. Gale, 1988. "Economic Effects of Federal Credit Programs," UCLA Economics Working Papers 483, UCLA Department of Economics.
  4. Sakakibara, Eisuke & Feldman, Robert A., 1983. "The Japanese financial system in comparative perspective," Journal of Comparative Economics, Elsevier, vol. 7(1), pages 1-24, March.
  5. Dailami, Mansoor, 1990. "Financial policy and corporate investment in imperfect capital markets : the case of Korea," Policy Research Working Paper Series 409, The World Bank.
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