We compare the investment–cash flow sensitivity of Korean chaebols (conglomerates) and non-chaebol firms. We show that investment–cash flow sensitivity is low and insignificant for chaebol firms but is high and significant for non-chaebol firms. On the other hand, a chaebol firm's investment is significantly related to the growth opportunities but that of a non-chaebol firm is not. A chaebol firm's investment is significantly affected by the cash flow of other firms within the same chaebol even though they are independent legal entities. With these findings, we argue that there is an internal capital market in a chaebol and the internal capital market reduces the financing constraints of the chaebol. However, the operation of the internal capital market does not improve the efficiency of allocation of scarce funds in the Korean economy since we find that chaebols invest more than non-chaebol firms despite their relatively poor growth opportunities.

This paper provides an empirical basis for identifying insider transactions by deriving a theoretical model, which incorporates the relationship between insider transactions and time series of stock returns. Thus, this model enables us detecting insider transactions by applying stock return time series. We show that when there is an insider transaction in the market, time series can be derived as an ARMA(1,1) process having closed solution coefficients. For validation of the model, we test publicly released insider transactions and reverse takeover events using the minute-by-minute stock price data. The selected events show higher pass rate of the detection criteria than the current detection system which shows that our model produces smaller Type II error than the existing post transaction-based cumulative abnormal return model.