This study analyzes financial constraints on business firms to enhance the effectiveness of policy financing. The importance of policy finance lies in its capacity to improve the efficiency of resource allocation in society overall by providing finances to firms unable to furnish capital from private financial markets due to a market failure. From a corporate viewpoint, market failures are business conditions faced with financial constraints, which mean difficulties obtaining necessary funds, despite good opportunities present in the market. Accordingly, it is expected that adequately identifying firms' financial constraints would boost the effectiveness of policy financing.

The study first constructed an index to measure the severity of corporate financial constraints based on business size and operation years. To verify the suitability of the index, the author examined whether firms less vulnerable to financial constraints would lower their debt ratio using the 2012 corporate tax cuts for medium-sized firms. Corporate tax reduction brings down corporate debt further as the supply curve of capital is elastic for firms without financial constraints. As a group of firms without such restrictions had a more significant drop in debt after the tax cut, the analysis confirmed that the new index successfully reflected the severity of financial constraints to a certain extent.

Furthermore, the study analyzed the Business Restart Funds operated by the Korea SMEs and Startups Agency to determine whether it is feasible to use financial constraints to better policy financing in its effectiveness. The analysis revealed that firms with severe financial constraints measured by the index ramped up investment after receiving policy funds, providing insights on generating more effective outcomes depending on the selection of beneficiary firms in executing policy financing.

Preface
Executive Summary

Chapter 1 Introduction

Chapter 2 Significance and Current Status of Policy Financing
　Section 1 Significance of Policy Financing
　Section 2 Types of Policy Financing
　Section 3 Current Status of Policy Financing

Chapter 3 Policy Financing and Financial Constraints
　Section 1 Market Failures and Financial Constraints in Financial Markets
　Section 2 Concept of Financial Constraints
　Section 3 Empirical Indicators of Financial Constraints
　Section 4 Suitability of Financial Constraint Indicators in Domestic Data

Chapter 4 Analysis of Policy Financing Effects Based on Financial Constraints
　Section 1 Business Restart Funds Program
　Section 2 Effectiveness Analysis of the Business Restart Funds Program

Chapter 5 Conclusion and Policy Implications

References
ABSTRACT