Internal Capital Markets in Business Groups: Evidence from the Asian Financial Crisis

Abstract

This paper examines capital reallocation among firms in Korean business groups (chaebol) in the aftermath of the 1997 Asian financial crisis, and the consequences of this capital reallocation for the investment and performance ofchaebolfirms. We show thatchaeboltransferred cash from low-growth to high-growth member firms, using cross-firm equity investments. This capital reallocation allowedchaebolfirms with greater investment opportunities to invest more than control firms after the crisis. These firms also showed higher profitability and lower declines in valuation than control firms following the crisis. Our results suggest thatchaebolinternal capital markets helped them mitigate the negative effects of the Asian crisis on investment and performance.