Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 23, No. 2, pp.283-320
ISSN: 1225-0279 (Print)
Print publication date 31 May 2010
Received 12 Oct 2009 Revised 07 Apr 2010

An Empirical Study on the Effect of Financial Structure on Investment: Does Debt Covenant Shrink Corporate Investment?

Hyun Jong Kim
Research Fellow, Korea Economic Research Institute, 8th Fl., Hana Daetoo Securities Bldg., 27-3, Yeouido-dong, Yeongdeungpo-gu, Seoul 150-705, Korea, Tel: +82-2-3771-0036, Fax: +82-2-785-0273

JEL Classification: L51, G31, G32, G38


After the crisis, affiliated firms of the business conglomerates selected as main debtor groups are mandated to contract the debt covenant that enforces to improve financial structure. This paper examines how the regulation on financial structure of main debtor groups affects investment of affiliated firms. Even though several economists insist that the regulation of the debt covenant ― including 200 % debt ratio cap ― makes the investment of main debtor groups decline, there is no empirical work testing the effect of the regulation on the investment in Korea. The empirical results of this study show that due to the debt covenant, the effect of debt on investment decreased after the crisis, and that specially during 1998 to 2000, the facility investment of affiliated firms in main debtor groups remarkably declined. Additionally, we examine whether a firm's control-ownership disparity affected its investment. Contrary to existing empirical papers, results of this study show that control-ownership disparity is not related with investment statistically, and so mean that a firm's ownership structure does not induce its excess investment.


Investment, Debt covenant, Main debtor group, Financial regulation


I would like to thank Keunkwan Ryu in Seoul National University for comments that have led to improvement of this research. All errors are my own. This is a revised and modified version of Chapter 3 of my research work, Two Empirical Studies on Financial Structure, Market Competition and Investment, KERI (2005). Paper presented at the 17th Seoul Journal of Economics International Symposium held at Seoul National University, Seoul, 16 October 2009.


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