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Accessibility to Capital Markets and the Sensitivity of Investment to Cash Flow(EP Vol.10 No.2)

연구조정실 (02-759-5407) 2008.01.03 9258

Accessibility to Capital Markets and the Sensitivity of Investment to Cash Flow

Author: Kwangwoo Park(KAIST Graduate School of Finance)

            Rae Soo Park(Gyeongsang National University)

            Suk Heun Yoon(Hallym University)

 

Using a unique data set on corporate governance and relationship banking
for listed Korean firms, we examine how the sensitivity of investment to cash
flow can vary depending on chaebol(business group) affiliation, the
soundness of corporate governance, and the intimacy of relationship banking.
In order to conduct this analysis, we categorize our samples into three
groups: 1) a group with easier access to internal capital markets (chaebol
group); 2) a group with easier access to bank loan markets (intimate banking
relationship group); and 3) a group with easier access to stock market (sound
corporate governance group). Then, we investigate investment-cash flow
sensitivities by analyzing sample firms in each category.
Our results show that cash flow measures play a significant role in
investment expenditures for Korean firms. Using the 'flow' concept of cash
flow which measures a firm's ability to generate profits, we find that both cash
flow and investment opportunities are not significantly affecting corporate
investment decisions. On the other hand, using the 'stock' concept of cash flow
which measures available funds, we find that cash flow is positively correlated
with investment expenditures. And this positive effect is more pronounced for
firms in non-chaebol groups, for firms with only a distant relationship with
banks, and for firms showing poor corporate governance practices. Our
evidence suggests that investment decisions by Korean firms are affected
significantly by the 'stock' concept of cash flow and this effect is greater for
firms with less easy access to capital markets. This result is consistent with the
idea suggested by Fazzari, Hubbard and Petersen (1988).

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