Financial Development and Investment in Korea

In this study, we investigate whether financial development could have a positive effect on the real economy in Korea through the investment channel. After deriving an investment function in which a firm’s investment is subject to financial restriction, we analyze whether financial development has reduced a firm’s financial restriction and analyze whether financial development has reduced a firm’s financial restriction by expanding available external financing that the firm faces. Using firm-level data in Korea from 1994 to 2011, we find that financial development affects a firm’s investment by reducing the firm’s financial restrictions. However, the effects of financial development on a firm’s financial restrictions are varied by industry or firm size. We also find that the financial crisis could deteriorate the effect of financial development on corporate investment.