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

This paper investigates the possible role of asset tangibility on corporate's investment decision. As Almeida and Campello (2007) suggest, firm's asset tangibility could promote firm's borrowing ability by providing more collateral to financial intermediaries, reduce financial restriction, and thus allow further investment. For this reason, we analyze corporate investment behavior in Korea by estimating firm's investment function incorporating asset tangibility, based on the endogenous switching regression model using firm-level data. Our empirical results suggest that the corporate investment behavior in the 2000s became different from that in the 1990s in terms of asset tangibility. In particular, asset tangibility played a more important role on the decision of a firm's investment in 2000s. Also, the effects of asset tangibility are different by firm-size, implying that 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 would be lower. It implies that asset tangibility could be considered an one of factors that caused a shrinkage movement of corporate investment of Korea in 2000s