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The purpose of this paper is to provide a survey of recent studies on Korean firms’ financial policies and their interactions with financial markets, and suggest directions for future research.

The authors review the finance research on Korean firms and markets, focusing on the articles published in the last 20 years.

This survey of the recent Korean finance literature covers the research on the capital structure and the distinct financing behaviors of chaebol-affiliated firms and independent firms; the factors affecting the costs of capital and firms’ preferences for capital budgeting methods; raising capital through public and private equity issuance; corporate governance and the market for corporate control; payout policies; and bank-firm relationship. The authors suggest a number of future research directions that may lead to significant contributions to the literature.

This paper provides the first comprehensive review of the post-crisis corporate finance literature in Korea.

The purpose of this paper is to examine the effect of controlling shareholders’ ownership of firms on the firms’ financial constraints in 22 economies for the 1982-2009 period.

The authors employ a generalized method of moments-based instrumental variables estimator to estimate empirical models.

It found that the overinvestment propensity of controlling shareholders becomes less severe with an increase in cash-flow rights. It further indicates that a higher deviation between the control rights and cash-flow rights of controlling shareholders lower their overinvestment propensity, thereby lowering the firm’s financial constraints.

The results suggest that a higher protective legal environment for minority shareholders blocks the entrenchment of controlling shareholders and thus benefitting the firm with slackened financing constraints in the given legal origin.

The authors present the results of a survey on how Korean firms evaluate new projects and estimate their capital costs. The authors report how Korean firms’ capital budgeting practices compare to other developed countries and to best practices in the field of finance.

The authors survey CFOs of major Korean firms on their capital budgeting practices. The authors then compare the results against the US and European firms and best practices of leading firms and financial advisors.

The authors find that the capital budgeting practices of Korean firms are as strong as or stronger than firms in developed markets. A majority of Korean firms use best practices techniques such as NPV, IRR and the CAPM for project evaluation and cost of equity estimation. Chaebol affiliation results in somewhat stronger capital budgeting practices. The authors also find that other factors, such as company size, leverage, CEO age and CEO education, impact capital budgeting practices.

This paper is the first article that comprehensively examines Korean firms' capital budgeting practices.

Using a sample of telecommunications mergers during the 1990–1993 period, we find that acquiring firms underperform relative to their size and industry-matched control firms. The annual cumulative abnormal returns (CARs) to these firms are significantly negative for five years following the merger. Shareholders of the acquiring firm suffer a wealth loss of nearly 20% over the five-year post-merger period. We obtain similar results from three- and five-year holding period returns (HPRs). Our findings are consistent with those of earlier studies and indicate that regulated industries also experience post-merger underperformance. We do find upon disaggregation of the sample that larger mergers exhibit positive long-run performance while the mid-size and smaller mergers underperform relative to their control firms. We further observe that conglomerate mergers demonstrate superior long-run performance while that for non-conglomerate mergers is consistent with the aggregate sample findings and suggests significant underperformance.

This chapter examines the effect of creditors’ monitoring role on the profitability of firm acquisitions. We use the shares retained by the lead arranger of a syndicated loan as a proxy for monitoring level. We find that acquirer announcement returns are positively related to the shares retained by the lead arranger. The effect of the lead arranger’s shares on the acquirer’s return becomes pronounced in cash acquisition deals, and when there exist financial covenants. Our results suggest that lead arrangers are important not only for monitoring loans but also for successful acquisitions by borrowers. An important policy implication of the main findings of this chapter on bank monitoring is that policy makers should design financial covenants to improve the efficiency of monitoring activities by lead arranging banks in syndicated bank loan deals.

We find a significant curvilinear relation between Japanese firm value and the percentage of equity held by foreign investors. Firm value rises until foreign ownership reaches approximately 40%, and then it begins to decline. It appears that large foreign institutional investors invest in well-performing firms and serve as effective monitors. Our results remain robust even after controlling for other corporate governance variables, such as equity ownership by main banks and board membership by foreign investors. It seems that most of the increase in firm value and the performance improvement are due to rising levels of equity ownership in non-keiretsu (independent) firms by foreign investors. We also show that an increase in foreign ownership is correlated with a rise in R&D expenditures, suggesting that foreign institutional investors contribute to the long-term viability and competitiveness of Japanese firms.