Corporate Finance and Physical Investment

If you ask a businessman what the factor to decide investment is, he may answer cash flow- revenues minus expenses. Choosing the best financing policies to effectively manage investment and growth is an important element of (short-term) financial management. And, many companies in Korea pay attention to these decisions. Our goal is to describe the effects of cash and dividend payments on firms’ physical investment. We have different view for external finance and dividend payments from Fazzari et al. (1988). They think that high-dividend firms finance additional investment by reducing dividends. But, we have to note that there occurs financial costs in stock market when reducing dividends. Romer(2006) argues that dividend reductions are interpreted as lower future profitability in stock market. In this case, the association will be weaker among the firms that face greater difficulties to external finance. These firms are in general low-dividend firms. We use panel data constructed from Bank of Korea(BOK) data from 2009 to 2014. We can see that low-dividend firms make stronger negative association between investment and internal funds. This implies that low-dividend firms have more negative association than high-dividend firms. We modeled the role of dividend in committing the payout of free cash flows to investors(creditors). We can see more wasteful activity in a firm with lower dividend payout, contrary to Fazzari et al. (1988).