Corporate excess savings: what does it have to do with M&A activities, cash holdings and debt repayments in Korea?

ABSTRACT

Corporate excess savings, or gross savings in excess of fixed capital formation, can affect the real economy through the financial decisions of individual firms. Based on an unbalanced panel of more than 2,000 Korean listed companies from 2003 to 2021, this study analyses how excess savings are used in individual firms’ financial activities and their consequent impact on aggregate demand at the macroeconomic level. Excess savings are most often used for debt repayment. Considering heterogeneity, the excess savings of large firms are mainly related to M&A, while the excess savings of small firms are relatively more disbursed to cash holdings for the precautionary motive. Since 2010, the extent of its use in M&A has become stronger; M&A in large firms appears to crowd out fixed capital formation for a certain period of time. When this analysis is applied at the industry level, it is also consistent with the results of individual firms.

KEYWORDS:

• Corporate excess savings
• M&A
• cash holdings
• change in corporate asset structure in Korea

JEL CLASSIFICATION:

• E2
• G3
• L1

Acknowledgments

This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2022S1A5C2A03093301).

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Most of the existing research subtracts the only dividend according to the definition of the national income account. Bebczuk and Cavallo (2016), Chen, Karabarbounis, and Neiman (2017), and Saibene (2019) are in this case. Villani (2021) does subtract neither dividends and share repurchases.

2. This paper follows the normalization employed in related papers. In Orhangazi(2008), “varibles are scaled by lagged capital stock to correct heteroscedasticity”. Fazzari, Hubbard, Petersen, Blinder, and Poterba(1988) also normalize cash by dividing lagged(beginning of period) captial stock. Similarly Bates, Kahle, and Stulz(2009) use total asset for normalization practice, which we follow here.

3. This paper is not also free from the limitations, which could be overcome by employing appropriate identification strategy such as estimating with instrument variables and so on. And regarding estimation equation, it is worth considering whether a constraint of ‘adding up’ should be imposed on our estimation. We test this adding up hypothesis repeatedly using both normalized variables and alternative growth term variables, but all results reject adding up hypothesis, which might be because excess saving could not be fully distributed to our categories of activities for some reasons. Unfortunately, our current dataset does not allow us to identify precise reasons.

4. Actually, an attempt in our research was made to analyse whether the cash holdings of large firms were for the formation of fixed capital or for investment in financial assets in next period, but no robust results were achieved. Such studies on this issue are needed in the future.