Investment and adjustment costs of Korean firms in view of Tobin's q

This paper investigates investment decisions of Korean firms in view of Tobin's q, and examines whether the adjustment costs of investment in group firms are lower than those in independent firms. We use firm-level data for 1,106 Korean manufacturing firms over the period 1982 to 2015. The results are as follows. First, group firms are much larger than independent firms, and investment rates are higher in group firms than in independent firms. Second, Tobin's q is a significant determinant of investment, and the adjustment costs of investment are smaller in group firms than in independent firms. Third, the adjustment-cost advantage of group firms is greater before the financial crisis of 1997. Fourth, a firm's cash holdings and foreign ownership contribute to increasing investment. This study suggests that group firms invest more than independent firms due to lower adjustment costs, and consequently contribute to economic growth through investment expansion.