Essays on Corporate Cash holdings and Business Groups

Abstract

Essays on Corporate Cash holdings and Business groups Yun Kyung Kim This dissertation studies corporate cash holdings in Korea, with its own business groups (“chaebols”), and the impact of Asian financial crisis in 1997-1998. The first essay examines the effects of cash on performance from 1994 to 2006. It first shows that cash-rich firms are more likely to survive and the exit rate of chaebol firms with large cash holdings during the crisis is much smaller. Moreover, large cash holdings in non-chaebol firms increase profitability compared to industry rivals after the crisis when external capital becomes more costly. Efficiently allocated internal cash holdings in chaebols, rather than affiliates’ own cash, are related to better performance in pre-crisis period. My results suggest that business group affiliation is a key to explain the effect of cash on market performance, and that the precautionary motive plays a central role. The second essay studies the determinants of cash in Korean listed firms from 1993 to 2006. I find that the amount of cash in business groups is significantly smaller than that in stand-alones. Chaebol firms with financial subsidiaries, which can provide alternative financial resources, can reduce cash holdings. I also find that diversification contributes to lower the level of cash in chaebols. Both sources became more important after the crisis. The results also suggest that the smaller amount of cash in business groups is driven by a smaller need for precautionary cash.