The capital structure adjustment through debt financing based on various macroeconomic conditions in Korean market

Abstract

We investigate the relationship between the capital structure and the economic conditions in Korean market. To find the adjustment behavior on capital structure depending on macroeconomic conditions, we use dynamic partial adjustment model to estimate adjustment speeds toward targets. As the data analyzed in the study, we use non-financial firms listed in the Korean stock exchange. Through the empirical test, we find evidence that is consistent with Hackbarth, Miao and Morellec (2006) and Cook and Tang (2010)’s arguments that firms tend to adjust faster their leverage toward target level in economic expansion. Thus, our findings support to the pecking order and market timing theories in terms of corporate finance theories on capital structure. In addition, our test results are re-confirmed with robust consistency even though we include year dummy variable in the empirical test model for controlling global financial crisis in contrast with Kim (2013).