Open AccessKorean Firms’ Allocation of Cash Flow
Author(s) -
Jin Park,
Jungwon Suh,
Heejung Choi
Publication year - 2019
Publication title -
seonmul yeon'gu/seonmul yeongu
Language(s) - English
Resource type - Journals
eISSN - 2713-6647
pISSN - 1229-988X
DOI - 10.1108/jdqs-04-2019-b0004
Subject(s) - cash flow , debt , operating cash flow , cash on cash return , monetary economics , cash flow forecasting , cash management , cash and cash equivalents , investment (military) , business , finance , cash flow statement , external financing , cash , economics , financial system , politics , political science , law
This study investigates where Korean firms allocate cash flow. Our sample consists of listed firms in the KOPSI section of Korea Exchange over the period 2001-2016. Our estimation based on a system of equations shows that the largest use of Korean firms’ cash flow is repaying debt, followed by buttressing cash reserves and financing investment. On average, Korean firms allocate 38.5% of cash flow to repaying debt (specifically, 27.3% to paying off short-term debt and 11.2% long-term debt), 32.1% to buttressing cash reserves and 21.5% to financing investment. After dividing the sample into financially constrained and unconstrained firms (based on dividends, firm size or bond ratings), we find that financially constrained firms use more of cash flow in financing investment but less of it in reducing long-term debt (or total debt) than financially unconstrained firms do. As a result, the negative relation—that is, substitution—between cash flow and external finance (primarily long-term debt issuance) is less strong for financially constrained firms than it is for financially unconstrained firms. This finding is consistent with Almeida and Campello’s (2010) result from their U.S. study.