A Research on the Determinants of Diversification of Korean Firms around the Occasion of Asian Financial Crisis
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In this paper we investigate the financial characteristics of Korean firms that determine the degree of diversification. It is confirmed that excess physical capacity will lead to related diversification. The hypothesis that existence of intangible assets will lead to related diversification is not confirmed. Rather, existence of intangible assets leads unrelated diversification. We document that existence of unused debt capacity leads to diversification on the whole and unrelated diversification. The hypothesis that availability of internal funds will lead to more unrelated diversification is also confirmed. The hypothesis that firms with high ROA will favor more related diversification is not supported. The hypothesis that larger firms will favor unrelated diversification is partly supported, since larger firms are also active in related diversification. We find that Korean firms with higher ownership concentration will favor more unrelated diversification contrary to the conjecture from Jensen and Meckling (1976). Finally, it is confirmed that chaebols pursue growth through unrelated diversification, which is in line with Chatterjee and Wernerfelt (1991). Firm risk, capital expenditures, and firm value do not explain related or unrelated diversification of Korean firms. Korean firms become less active in diversification activities after the Asian financial crisis in 1997. Firms with large size and higher concentration, however, are not taken aback in their pursuit of growth by way of diversification activities in the event of Asian financial crisis.
Abstract
In this paper we investigate the financial characteristics of Korean firms that determine the degree of diversification. It is confirmed that excess physical capacity will lead to related diversification. The hypothesis that existence of intangible assets will lead to related diversification is not confirmed. Rather, existence of intangible assets leads unrelated diversification. We document that existence of unused debt capacity leads to diversification on the whole and unrelated diversification. The hypothesis that availability of internal funds will lead to more unrelated diversification is also confirmed. The hypothesis that firms with high ROA will favor more related diversification is not supported. The hypothesis that larger firms will favor unrelated diversification is partly supported, since larger firms are also active in related diversification. We find that Korean firms with higher ownership concentration will favor more unrelated diversification contrary to the conjecture from Jensen and Meckling (1976). Finally, it is confirmed that chaebols pursue growth through unrelated diversification, which is in line with Chatterjee and Wernerfelt (1991). Firm risk, capital expenditures, and firm value do not explain related or unrelated diversification of Korean firms. Korean firms become less active in diversification activities after the Asian financial crisis in 1997. Firms with large size and higher concentration, however, are not taken aback in their pursuit of growth by way of diversification activities in the event of Asian financial crisis.
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