Persistence and the Cross-Section of Corporate Capital Structure: Case of South Korea

Abstract

This thesis aims to study the persistence and cross section of corporate capital structure in South Korea from 1987 to 2011. In our analysis, we find that there have been differences in leverage across Korean firms, i.e. very high levered, medium levered, very low levered firms. In addition, firms tend to maintain their level of capital structure persistent over a long period of time. These differences in leverage reveal the existence of firm fixed effects, which in our examination captures the majority of the variation in leverage. It contributes over 80% to the total explained sum of squares in the analysis of co-variance (ANCOVA) of leverage. Furthermore, from studying the regression model to find the speed that firm adjusts its leverage to the optimal, the speed of adjustment increases to double if we include firm fixed effects.

Lastly, the thesis finds that estimated coefficients on the determinants of book leverages are largely different from those on the corresponding determinants of market leverage. The results of test on market leverage from Korean data seem to match with the results achieved using the similar methodology with the data in the U.S.