Evidence for the Existence of Firms' Optimal Capital Structures in Korea

Abstract

We investigate the evidence for the existence of optimal capital structure in Korea, using the simplest and the most intuitive methods inspired by the idea of the trade-off theory. We have found some evidence that supports the existence of optimal capital structure. First, firms with high debts or bankruptcy probability levels reduce their gearing ratios in the coming year. Second, there is a tendency to reduce debt ratios for firms when adjusting their gearing ratios during our sample period. Third, there are significant differences in debt ratios across industries. Fourth, firms have a significant level of capital structure adjustment speeds. Our results, therefore, present more intuitive evidence for the existence of optimal capital structure.