How Do Capital Structure Policies of Emerging Markets Differ from Those of Developed Economies? Survey Evidence from Korea

Abstract

We examine the capital structure policies of Korean firms using survey data for business group (chaebol) firms and independent firms. Our results are compared with the findings in the earlier studies for developed economies: Graham and Harvey (2001) for the U.S. and Brounen, De Jong, and Koedijk (2006) for Europe. Korean CFOs are concerned about financial flexibility and volatility of earnings when issuing debt, and they are concerned about target debt ratio maintenance and recent stock price increase when issuing equity. In contrast with independent firms, chaebol firms are more concerned about differences in corporate tax rates between foreign and domestic markets, and the risk of refinancing in bad times. Chaebol firms are less likely to issue debt when faced with insufficient internal funds, which indicates that active internal capital markets are at work among the firms in a business group. Compared to the U.S. and European firms, our results suggest that Korean firms are under more pressure from their peers in formulating capital structure policies, consider equity as a cheap source of financing, are less concerned with the dilution of earnings per share, and less frequently provide shares to employees for compensation.