What is it about?
Companies must decide how much debt and equity to use and when to raise additional financing. This study examines how Korean companies make these capital structure decisions and compares their practices with those of firms in the United States and Europe. Using survey responses from chief financial officers, we examine the factors that influence decisions to issue debt and equity. We also compare firms affiliated with large Korean business groups, known as chaebols, with independent firms to determine whether their financing decisions differ.
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Why is it important?
Much of what we know about corporate financing decisions comes from studies of firms in developed markets, particularly the United States and Europe. This study provides evidence from Korea and shows that some important financing practices differ across markets. Korean firms place considerable importance on financial flexibility and earnings volatility when making debt decisions and on maintaining target debt ratios and recent stock price increases when issuing equity. We also find important differences between chaebol and independent firms, including evidence that internal capital markets within chaebols influence financing decisions. These findings provide useful insights into how a country's institutional and corporate environment can shape corporate financing practices.
Perspectives
The motivation for this study came from recognizing that most survey evidence on corporate financing decisions was based on firms in developed markets. We wanted to examine whether Korean firms make capital structure decisions in similar ways and whether the distinctive characteristics of the Korean corporate environment influence these decisions. We were also interested in whether firms affiliated with chaebols differ from independent firms in their financing practices. Our findings reveal both similarities and important differences between Korean firms and firms in the United States and Europe, as well as differences between chaebol and independent firms. I hope this study contributes to a better understanding of how corporate financing decisions vary across countries and institutional environments.
Dr. Hongbok Lee
Western Illinois University
Read the Original
This page is a summary of: How Do Capital Structure Policies of Emerging Markets Differ from Those of Developed Economies? Survey Evidence from Korea, SSRN Electronic Journal, January 2013, Elsevier,
DOI: 10.2139/ssrn.2314732.
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