Debt Maturity And Investment Efficiency Evidence From Korea

Abstract

This study empirically analyzes the effect of debt maturity on investment efficiency, which is measured by using McNichols and Stubben (2008). Debt maturity is measured using current debt ratio and dummy variable. Specifically, we will investigate how short-term debt affects investment efficiency. Additionally, we will investigate the relation between the short-term debt affects investment efficiency according to debt maturity group.

The results of this study are as follows. First, the short-term debt and investment efficiency were significantly positive (+) in both the total sample and the over-investment sample. Second, as a result of analyzing the maturity of debt by group according to the current debt ratio, the relationship between earnings quality and investment efficiency was significantly positive (+) in the short-term debt group. it is suggested that debt maturity and investment efficiency can be different for the total sample, over-investment sample, under-investment sample, and the relationship between earnings quality and investment efficiency can be differentiated by debt maturity group.

This study has following additional contributions in comparison with domestic prior studies related to investment efficiency. First, prior studies related to investment efficiency are mainly concerned with the quality of financial reporting. This study implies that the relationship between investment efficiency and quality of financial reporting, and the relationship between debt maturity and investment efficiency among the characteristics of debt. Second, from the results of the analysis of the debt maturity and investment efficiency, it is confirmed that the debt is operating as a mechanism to monitor the investment efficiency of the corporation. Third, the analysis of debt maturity group suggests that the relationship between earnings quality and investment efficiency may be differentiated by short and long debt levels during debt financing.

The limitations of this study are as follows. First, we might have not considered omitted other variables. Second, we might not have fully considered other proxies for the characteristics of the debt maturity and investment efficiency. Third, there may be a measurement error in the quality of earnings and investment efficiency. Finally, the relationship between debt maturity and investment efficiency can vary depending on the circumstances of the company. For example, specific debt contract provisions or national regulatory environment. Therefore, attention should be paid to the generalization of the results of this study.