The Capital Structure of Chaebols

Abstract

In this chapter, we will examine the financial market environment in which chaebols operate and then analyze chaebols' capital structure. Specifically, we will focus on the correlation between Korean financial markets and chaebols' heavy use of debt. We will also consider the practices that chaebols use in their internal capital market, including loans, debt guarantees, and cross shareholding. This analysis will lead to a deeper understanding of how chaebols were vulnerable to the foreign exchange crisis in 1997. FINANCIAL MARKET ENVIRONMENTS IN KOREA The Korean Government's Intervention Korean economic development was spurred on by active governmental intervention and Economic Development Plans, which aggressively channeled necessary capital into “strategic” industries, including export-oriented industries and heavy and chemical industries. After the 1961 coup d'etat, President Chung-Hee Park nationalized all private banks, which afterward ceased to function as credit examiners and instead functioned as a tool of Korean government's industrial and resource allocation policies. He also placed the nation's central bank, the Bank of Korea, under the supervision of the Ministry of Finance, which made major monetary decisions such as setting interest rates and discount rates and conducting open market operations. During this period, the Korean government also absorbed and mediated the risked faced by embryonic firms in the industries it supported. In many cases, it pledged payment guarantees to secure foreign loans for industrialization.