Value of Conglomerate Business Structure in Liquidity Crisis: Evidence from Korea during Asian Financial Crisis

Abstract

Large developing market conglomerates emerge in response to underdeveloped capital market conditions. These business groups dominate in many developing economies partially because they are able to overcome limitations in capital markets through internal financing among intra-group affiliates. Many corporate finance literatures have identified costs and benefits of this internal capital market. However, whether internal capital market creates or destroys value in liquidity crisis has rarely been studied. This paper examines the case of Korean conglomerates, or chaebols, during the Asian Financial Crisis of late nineties. According to maturity mismatch hypothesis, firms with short-term liabilities in excess of short-term assets are severely affected by external liquidity contractions. If this hypothesis holds in the case of Asian Financial Crisis and internal capital markets were indeed effective in providing liquidity to conglomerate affiliates, then these affiliates would be less severely affected by liquidity contraction during the crisis than unaffiliated firms. Using firm fundamental data, this study supports maturity mismatch hypothesis for firms unaffiliated with conglomerates, but finds significantly conflicting evidence for the affiliated firms.