IS THE INVESTMENT OF KOREAN CONGLOMERATES INEFFICIENT?

Abstract

Inefficient major conglomerates have been partly blamed for the recent economic crisis in Korea. Although theoretically conglomerates may or may not be efficient, it is popular to attribute many economic illnesses to major conglomerates in Korea. This paper examines if Korean major conglomerates are indeed inefficient by examining their investments. Following Scharfstein (1998), this paper compares major conglomerates with the other firms. Specifically, if major conglomerates are indeed inefficient, major conglomerates invest less in productive opportunities (high Tobin's q) and more in less productive opportunities (low Tobin's q) than the other firms. This paper finds that major conglomerates invest inefficiently and therefore concludes that the recent reforms of major conglomerates in Korea are Justified.