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

Abstract

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.