The Wealth Effects of Capital Investment Decisions: An Empirical Comparison of Korean Chaebol and Non-Chaebol Firms

This paper investigates the capital investment decisions of Korean firms and their impact on shareholder wealth. Overall, we find positive abnormal returns surrounding the announcements of 697 cases of investment projects during the period 1992-1999. This paper also finds that the investment decisions of business group (chaebol-affiliated) firms do not increase shareholder wealth, while the capital investment decisions of non-chaebol firms generate significantly positive abnormal returns. The multivariate tests provide consistent evidence that the announcement effects for chaebol firms are lower than for non-chaebol firms, after growth opportunities, investment size and firm size are controlled for. The findings support the view that the organizational structure of Korean chaebols creates an incentive for managers to make non-value maximizing capital investment decisions.