Impact of Business Portfolio Diversification on Construction Company Insolvency in Korea

Abstract

This study aims to conduct an empirical analysis of the impact of diversification on construction company insolvency through a vector error correction model (VECM). The study focuses on a series of structural changes in the Korean construction industry as well as on the fluctuation process of construction business portfolios. This study calculated the diversification index to subrogate diversification level and used it as an analytical variable. The gross domestic product (GDP), Korea Composite Stock Price Index (KOSPI), construction investment, and interest rate are used as analytical variables representing macroeconomic variables. Finally, the expected default frequency (EDF) is calculated to indicate the level of construction company insolvency and used as its proxy variable. The analysis results differed from what was previously understood about Korea. EDF fluctuation was in a positive direction owing to the impact of diversification and had a response of approximately 0.032% in