Financial Liberalization and Corporate Investments: Evidence from Korean Firm Data*

Abstract

This paper examines whether financial liberalization procedures introduced in Korea in the early 1990s succeeded in relaxing financing constraints on firms. Because external funds are more costly than internal funds in an imperfect capital market, corporate investments depend on the availability of internal funds. As financial liberalization mitigates constraints on firms, the sensitivity of investments to cash flow can be reduced. Using panel data on Korean firms, we found that cash-flow effects on investment spending decreased drastically during the liberalization period. In particular, small, non-chaebol and established firms that were severely constrained gained most from liberalization. Chaebol firms appeared to lose preferential access to credit after liberalization.

How loan interest rate liberalization affects firms’ loan maturity structure

“…For example, in Laeven (2003) the empirical analysis on corporate panel data in 13 developing countries shows a remarkable improvement of small-sized enterprises in terms of financing limitations after rate liberalization. Gelos and Werner (2002) as well as Koo and Shin (2004) achieved similar results from data in Mexico and South Korea.…”

Does Financial Liberalization Influence Saving, Investment and Economic Growth? Evidence from 25 Emerging Market Economies, 1973-1996

“…His study is based on information from 13 developing countries. Similarly, positive effects of financial liberalization on reducing financial constraints are found, among others, by Koo and Shin (2004) for Korea, Harris, Schiantarelli and Siregar (1994) for Indonesia, Guncavdi, Bleaney and McKay (1998) for Turkey, and Gelos and Werner (2002) for Mexico. At the same time, however, studies by Jaramillo, Schiantarelli and Weiss (1996) on Ecuador and Hermes and Lensink (1998) on Chile find much less supportive evidence for the positive effect of financial liberalization on reducing financial constraints.…”

Financial globalization and debt maturity in emerging economies

“…All three liberalizations are statistically significant in explaining the increase in the proportion of 21 Several country cases already analyze firm-level data around the liberalization of the domestic financial sector. See Boyle and Eckhold (1997) for New Zealand, Gallego and Loayza (2000) for Chile, Gelos and Werner (2002) for Mexico, Harris et al (1994) for Indonesia, Jaramillo et al (1996) for Ecuador, and Koo and Shin (2004) for Korea. 22 Though these results are not reported here, they are available upon request.…”