How Korean Companies Finance Their Investments and Cash Needs

What is it about?

Companies can obtain funds from several sources, including internally generated cash, asset sales, borrowing, and issuing new equity. This study examines how Korean firms use these sources to finance their investments and meet their cash needs. Using data from Korean firms over the period 1996–2015, we find that firms tend to match particular sources of funds with particular uses. Cash generated from investing activities, such as asset sales, is the primary source of funding for capital expenditures. When firms face cash deficits, they rely first on cash from investing activities, followed by short- and long-term debt, and then equity financing.

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Why is it important?

Understanding how companies choose among different sources of financing is a fundamental issue in corporate finance. Traditional capital structure theories generally focus on choices among debt, equity, and internal funds, but firms can also generate substantial funds through investing activities, such as selling assets and financial investments. Our findings show that these cash flows play an important role in Korean firms’ financing decisions. In particular, cash inflows from investing activities are the largest source of funds used to cover cash deficits, followed by debt and then equity. These results provide a broader understanding of corporate financing behavior and suggest that financing theories can be improved by explicitly considering cash flows from investing activities.

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