Determinants of Corporate Financial Investment : Evidence from Korea

Using data on Korean non-financial companies (NFCs) over the sample period from 2010-2019, we find that the traditional measure of corporate cash holdings underestimates their financial assets. Firms with lower cash flow tend to invest in risky financial assets, which is inconsistent with the precautionary motive of cash holdings. We further show that distressed firms facing operational difficulties invest more in risky financial assets in response to a decrease in operating profit or sales growth rate, or an increase in short-term financial liability. We argue that NFCs invest in risky securities in pursuit of yield to make up for their lower operating performance.