The Role of Asset Tangibility on Corporate Investment Under Financial Constraints in Korea

The purpose of this paper is to investigate the possible role of asset tangibility (mainly collateral) on corporate’s investment decision. To satisfy the purpose, we highlight the differences of corporate investment behaviors between the 1990s and the 2000s considering its financial phase. The empirical analysis is mainly based on the endogenous switching regression model using firmlevel panel data from 1994 to 2009 in Korea. According to the empirical results, the corporate investment behavior in the 2000s became different from that in the 1990s, especially in terms of asset tangibility. In particular, asset tangibility played a more important role on the decision of a firm’s investment after 2000. In addition, the firm size effect on investment is significant only through the interaction variable between cash flow and asset tangibility under financially constrained phase, of which a small to medium-sized firm under financially constrained phase has a lower interaction effect on investment. This implies that even if a small to medium-sized firm has the same conditions as a large firm, the investment effects of asset tangibility or cash flow in the small to medium-sized firm is lower. However, this gap does not diminished during the 2000’s because there is no statistical evidence that the firm size effect changes between two periods - the 1990s and the 2000s