After the crisis, the remarkable change on financial structure of Korean firms is the diminishment of debt ratio. In 1997 the average debt ratio of Korean manufacture firms was 396.3%, while the ratio is 116.1% in 2003. The average debt ratio have diminished as one third for several years. It is certainly true for the big financial structural change to affect strategical decisions of chief executive officers in Korean firms. Since the market competition and investment are the strategical decisions of firms, in order to scrutinize the effect of financial structure on the CEO's decision, I research how the decrease in debt ratio affects product market competition and facility investment. This paper is consisted of two empirical studies; In the first empirical work I examine how firms' financial structure their own product decisions in market competition. While the second one is an study on the effect of regulations into debt ratio on facility investments.

There are two theories on the relationship between financial structure and product market competition. one is called limited liability effect theory where the limited liability of leveraged firms induces the moral hazard that leveraged firms choose higher(risky) level of production relative to non-leveraged firms. on the other hand, the second one is called strategic bankruptcy effect theory where the leveraged firms are vulnerable from the threat of predatory pricing by non-leveraged rival firms so leveraged firms produce lower rather than non-leveraged firms do. After two conflicting theories, economists have tried to empirically study the relationship between debt ratio and production level and received the consistent consensus that empirical works support not limited liability effect theory but strategic bankruptcy theory. Korean companies, specially the conglomerate, Cheabol, are recognized to hold lots of limited liability effect in literatures, while the debt ratio of Korean firms are remarkably decreased after the economic crisis. Hence the first empirical study of this paper examines the interaction between financial structure and production equilibrium in Korea. The result of this empirical test shows that the sign of relationship between debt ratio and production level, and that it depends on the expansion of the industry. In detail, in the high expanding industry such as electronic industry, automobile and tractor industry, machine industry, and metalworking industry shows the negative sign, while the low expanding industry such as food industry, textile and clothing industry, lumber industry reports the positive sign. This result means that the recognition that the high leveraged level of Korean firms induces excess investment and excess product is empirically incorrect.

After the crisis, affiliated firms of the business groups selected as main debtor groups are mandated to contract the debt covenant that enforces to improve financial structure. The second empirical work of this paper examines how this regulation on financial structure of main debtor groups affects investment of affiliated firms. Even though several economists insist that the regulation of the debt covenant?including 200% debt ratio cap?makes the investment of main debtor groups decline, there is no empirical work testing the effect of the regulation on the investment in Korea. The empirical results of this study show that due to the debt covenant, the effect of debt on investment decreased after the crisis, and that specially during 1998 to 2000, the facility investment of affiliated firms in main debtor groups remarkably declined. Hence the empirical results demonstrate that the regulation on financial structure withers investment away, and so implicate that deregulation of the debt covenant improve the facility investment of affiliated firms. Additionally, the second empirical study also examines whether a firm’s ownership structure affected its investment. Existing empirical works use the stock shares of controlling shareholders as the ownership structure variable. However, the stock shares of controlling shareholders represent not only the ownership but also voting rights, because the ownership is a part of control rights. Therefore, I investigate whether a firm’s control-ownership disparity affected the its investment. Contrary to existing empirical papers, results of this study show that control-ownership disparity is not related with investment statistically, and so mean that a firm’s ownership structure does not induce its excess investment.