Relationship between the financial crisis of Korean construction firms and macroeconomic fluctuations

Abstract

Purpose This study aims to analyze the relationship between the financial crisis of Korean construction firms and macroeconomic fluctuations.

Design/methodology/approach In this study, current ratio has been used an acting variable for liquidity ratio, and debt ratio for leverage ratio. GNI (Gross National Income), L (index of Liquidity), exchange rate, interest, and CPI (Consumer Price Index) were used for the macroeconomic variables. VECM consisted of Crt model and Drt model to analyze the relationship between current ratio and macroeconomic variables, and between debt ratio and macroeconomic variables, in order to analyze each model through variance decomposition and impulse response function.

Findings In Crt model, L is revealed as highly influencing current ratio. In other words, most fundraising is focused on highly capable financial institutes, investment corporations and public funds, since the scale of construction project funds is huge. Such financial sources actually belong to index L (index of Liquidity), but are calculated as current liability in the financial statements of construction firms, knotting an inverse relationship with current ratio. In Drt model, interest is revealed as significant against debt ratio. This seems to be because each construction project needs to raise substantial funds, and the amount to repay is directly influenced by interest fluctuation.

Research limitations/implications The collected data are limited, as the time series data of current ratio and debt ratio were secured based on the financial statements of the most capable 30 construction firms in Korea. If the sample companies were divided in future research according to scale, in order to analyze the relation between financial crisis and macroeconomic fluctuation by company scale, a more developed result could be obtained.

Practical implications This study is a useful research to analyze the dynamic relationship between the financial crisis of construction firms and macroeconomic fluctuations. This study can be used to establish a set of countermeasures to apply in the event of macroeconomic fluctuation.

Originality/value The financial ratios of construction firms are directly used for analysis, making this a more practical analysis than studies of the relationship between macroeconomic fluctuations and the comprehensive indices of construction business.