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The Very Dark Side of Internal Capital Markets: Evidence from Diversified Business Groups in Korea

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  • Lee, Sangwoo
  • Park, Kwangwoo
  • Shin, Hyun-Han

Abstract

This paper examines the capital allocation within Korean chaebol firms during the period from 1991 to 2000. We find strong evidence that, during the pre-Asian financial crisis period in the early 1990's, poorly performing firms with less investment opportunities invest more than well-performing firms with better growth opportunities. We also find the evidence of cross-subsidization among firms in the same chaebol group during the pre-crisis period. It appears that the existence of the "dark" side of internal capital markets explains most part of this striking phenomenon where "tunneling" practice has been common during the pre-crisis period. However, the inefficient capital allocation seems to disappear after the crisis as banks gain more power and market disciplines inefficient chaebol firms.

Suggested Citation

  • Lee, Sangwoo & Park, Kwangwoo & Shin, Hyun-Han, 2005. "The Very Dark Side of Internal Capital Markets: Evidence from Diversified Business Groups in Korea," CEI Working Paper Series 2005-7, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2005-7
    Note: This Version: May 8, 2005
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    File URL: https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/13497/wp2005-7a.pdf
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    References listed on IDEAS

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    2. Heechul Min & Wook Sohn, 2008. "Closing inefficient affiliates: evidence from Korean conglomerates," Applied Financial Economics, Taylor & Francis Journals, vol. 18(16), pages 1351-1361.

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