Second, the impact of the tax-adjusted q on investment is estimated to be consistent across size of firms. Small and medium-sized firms, however, show a somewhat larger coefficient. The cash flow variable remains statistically significant and we find slightly larger coefficients for smaller firms.

Third, tax-adjusted q affects non-chaebol firms’s investment more strongly. The estimated coefficient for non-chaebol firms is 0.0179 compared to 0.0075 for chaebol firms, the former being considerably more significant than the latter. Also, the cash flow variable is more meaningful (statistically significant and positive) for non-chaebol firms compared to chaebol affiliated firms.

Fourth, decomposing the q into tax-unadjusted q and the tax term, we find that the coefficient of the tax term is much larger than the tax-unadjusted q implying that tax policy is a very important factor affecting investment. The tax term coefficient for the whole sample is estimated at 0.63. Large firm’s coefficient is estimated at 0.45 compared to 0.65 for small- and medium-sized firms. For chaebol and non-chaebol firms, the corresponding estimated coefficient is 0.57 and 0.77, respectively. This implies that the impact of preferential tax policy are larger for non-chaebol and small and medium-sized firms compared to chaebol and larger firms.

The following policy implications are suggested. We conclude that the business tax incentives do affect corporate investments significantly. Hence, to enhance investments of Korean manu- facturing firms, it is important to lower corporate tax rates and to improve the tax incentive systems. In addition, it should be realized that the small- and medium-sized and particularly non-chaebol firms are more responsive to tax policy changes.