How a financial crisis affects the financing pattern of financially constrained firms in Korea?

Abstract

The negative relation between internal funds (profitability) and the issuance of debt is well known fact in corporate finance. In this paper, this relation is further investigated by comparing the difference in the sensitivity between financially constrained and unconstrained firms. Also, the changes in the sensitivity between pre and post economic crisis are studied to deepen our understanding on firms’ pattern on financing. We find robust evidence that constrained firms, which are more likely to face high external financing cost, demand more external financing. We argue that the complementarity between internal funds and external financing witnessed in constrained firms is caused by interplay between external financing and investment decisions and this interdependence play more important role after economic or financial crises.