The effects of policy funds on the financing constraints of small- and medium-sized enterprises in South Korea

ABSTRACT

This study investigates whether small- and medium-sized enterprises (SMEs) policy funds in South Korea are effective in reducing financing constraints faced by the SMEs. We find that investment-cash flow sensitivity decreases after public loans are granted, and furthermore that this decrease in the sensitivity is greater for younger and smaller firms. These results are consistent with the certification effects hypothesis.

KEYWORDS:

• Financing constraints
• investment-cash flow sensitivity
• SME financing
• SME policy funds

JEL CLASSIFICATION:

• G2
• G3

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Fazzari, Glenn Hubbard, and Petersen (1988) and many subsequent scholars suggested that a positive relationship between corporate investment and cash flow is an indication of financing constraints.

² Note, because the beneficiary firms are unlisted, the market reactions to announcements of approval are not available. Thus, the traditional CAR test is not applicable in these cases.