Do Korean Firms Have Changed Their Financing Patterns and Capital Structures after the Asian Financial Crisis

Abstract

We investigate Korean firms’ financing patterns, including debt and equity issuance and capital structure adjustment speed. According to the trade-off theory, firms need to change their capital structure to maximize their value by achieving their optimal capital structures. In the pecking order theory, firms issue debt first when they need cash. Our results show that firms have changed (or adjusted) their capital structures over a twenty year span, and they mainly use equity issuance. Our result denies the pecking order theory, but may support the market timing theory and trade-off theory. We use Frank and Goyal’s (2003) method and a dynamic partial adjustment process to test it. Furthermore, we have used a System GMM estimator to improve the reliability of our results as we use a panel data set that likely has an endogeneity problem. We also use both book and market based debt ratios and other financial ratios.