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

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.