Zero leverage policy and corporate overinvestment – Evidence from Korea
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Our study investigates the effect of firms’ zero leverage (ZL) policy on overinvestment in the Korean market. We hypothesize that adopting a ZL policy reduces the likelihood of future overinvestment. In particular, given the unique features of Korea’s business environment, we examine whether this relationship differs between chaebol-affiliated firms, a unique type of family-controlled conglomerates, and non-chaebol firms. Our analysis indicates a significant negative relationship between Korean firms’ ZL policy and overinvestment, especially for chaebols. This finding is pronounced for firms with dividend policy, implying that dividend payouts serve as an additional mechanism which enhances the credibility of ZL decisions in mitigating overinvestment. Our research supports both agency and signaling theories by demonstrating that ZL policy, when accompanied by dividend payments, enhances firm transparency and mitigates investment inefficiencies.
Abstract
Our study investigates the effect of firms’ zero leverage (ZL) policy on overinvestment in the Korean market. We hypothesize that adopting a ZL policy reduces the likelihood of future overinvestment. In particular, given the unique features of Korea’s business environment, we examine whether this relationship differs between chaebol-affiliated firms, a unique type of family-controlled conglomerates, and non-chaebol firms. Our analysis indicates a significant negative relationship between Korean firms’ ZL policy and overinvestment, especially for chaebols. This finding is pronounced for firms with dividend policy, implying that dividend payouts serve as an additional mechanism which enhances the credibility of ZL decisions in mitigating overinvestment. Our research supports both agency and signaling theories by demonstrating that ZL policy, when accompanied by dividend payments, enhances firm transparency and mitigates investment inefficiencies.