“Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis” by Heitor Almeida
University of Illinois at Urbana-Champaign
Chang Soo Kim
This paper provides new evidence on the efficiency of capital allocation of business groups' internal capital markets, by comparing the investment behavior and the performance of Korean business group (chaebol) firms with non-chaebol Korean firms in the aftermath of the 1997 Asian financial crisis. We employ a difference-indifferences matching estimator to control for observables, and a battery of placebo and other tests to evaluate alternative explanations such as selection of firms into chaebol, and demand effects that differentially affect chaebol and control firms. The results show that chaebol firms invest significantly more than control firms in the aftermath of the crisis, but not during normal periods including a recession year. Chaebol firm post-crisis investment is positively associated with variables that proxy for the availability of internal capital markets, including industry diversification within chaebol and chaebol liquidity. Chaebol firms with greater investment opportunities increased investment the most in the aftermath of the crisis, a pattern that is not observed in pseudo-chaebol that we construct using control firms. Finally, we find that chaebol firms showed higher profitability and lower declines in valuation than control firms in the aftermath of the crisis. Overall, our results suggest that Korean chaebol used their internal capital markets to mitigate the negative effects of the Asian crisis on corporate investment.