Post-Crisis Corporate Reform and Internal Capital Markets in Chaebols

Abstract

The 1997 financial crisis turns out to be a major turning point in the history of Korean chaebols. The post-crisis corporate reform has resulted in a dramatic change in the landscape of chaebols as about one half of the top 30 chaebols changed their names after the crisis. The reform was swift and unprecedented in its comprehensiveness encompassing a wide range of structural changes in the financial structure and corporate governance of chaebols. Improved transparency and strengthened shareholder rights helped chaebols to have greater access to cheaper external finance made available by capital market opening.

Nevertheless, the corporate reform is an ongoing process in Korea with full effects yet to be seen. Our empirical findings suggest that the role of internal capital markets has faded out after the crisis but not fully yet. Investment by non-listed chaebol firms remains fairly insensitive to the own cash flow if the firm belongs to a chaebol that owns financial intermediaries. The positive effect of corporate reform appears to have been felt asymmetrically between non-listed firms whose ownership is more concentrated and listed firms that are now subject to more stringent international standards and monitoring by shareholders. These findings imply that key policy challenges in the future are to eliminate the gap between de jure institution and de facto enforcement standards.