Financial reforms and firm investments in Korea: A switching regression approach.

摘要

This paper investigates whether financial reforms in Korea have an impact on relaxing financing constraints in firms and what categories of firms benefit most from the financial reforms, and the paper examines a panel dataset of Korean manufacturing firms over the period 1990-2003. The methodology of the paper is based on the Euler equation model with switching regression. The paper shows that the financially constrained firm investments are more sensitive to cash flow than are unconstrained firms, but the financing constraints of firms become less important for firm investments after the financial reforms. Moreover, this paper finds that the effects of financial reforms are differential for different groups of firms: the reforms have been successful in reducing the financing constraints of non-Chaebol firms, small firms, and young firms but not for Chaebol firms, large firms, and mature firms. Finally, the estimation results for the switching function reveal that a firm's debt level, ownership concentration, return on equity ratio, growth rate of sales, age, and size play a significant role in identifying two investment regimes. The coefficients of debt to equity ratio and ownership concentration have positive signs, indicating that a firm with higher debt ratio or concentrated ownership is more likely to be the constrained regime. In contrast, the coefficients of return on equity ratio, growth rate of sales, age, and size have negative signs.