Changes in Chaebol Firms’ Over-investment after the Asian Financial Crisis

초록

This paper examines chaebol firms’ over-investment practices in pre- vs. postfinancial crisis in Korea. Korean firms, especially chaebols, became very profitable after the Asian financial crisis. The financial crisis affected chaebol firms to restrict internal financing through arbitrary transactions among their affiliated firms, and to focus more on long-term value which contributes to future operating performance. These changes of business environment in Korea following the financial crisis are likely to have led chaebol firms to reduce over-investment that could have resulted in lower future operating performance. We find that chaebol firms have significantly reduced over-investment after the Asian financial crisis compared to non-chaebol firms. We also find that chaebol firms became less inclined to engage in earnings management in order to implement over-investment after the financial crisis due to increased demand for transparent financial reporting and investors’ monitoring. Finally, we document that chaebol firms have had significantly higher long-term operating performance in the post-financial crisis than non-chaebol firms. This study provides understanding of the effects of economic shock on the investment practices of chaebol firms. Our findings suggest that shift in chaebol firms’ financing source from internal to external capital markets and emphasis on long-term value of the firm in the post-financial crisis reduce chaebol firms’ over-investment practices, bringing about sharp rebound in business performance.