The study of zero leverage firms in Korea

Abstract

Similar to international scope studies, zero leverage is a notable phenomenon in Korea. Zero leverage firms become increasingly more prevalent especially after the financial crisis. Consistent with the literature, zero leverage firms in Korea are small, less tangible, hold more cash, more profitable, and pay more tax. The empirical analysis support pecking order theory to the extent that the unlevered firms are more profitable and have more cash. In support of the trade off theory is the fact that unlevered firms are small and less tangible. Yet as for the discretionary spending, earnings volatility and Tobins q, the result is not robust enough to determine the implications. As for alternative explanations of zero leverage behavior, KOSDAQ firms are especially in support of the financing constraint explanation to the extent that the zero leverage firms are smaller, less profitable, exhibit high Tobinss q and low tangibility. Further review of governance reveals that zero leverage firms in Korea are more likely to be held by foreign investors, have higher governance index and are part of chaebol group.