IMPACT OF FINANCIAL CRISES ON THE DYNAMICS OF CAPITAL STRUCTURE: EVIDENCE FROM KOREAN LISTED COMPANIES

This study examines the impact of the 1997 Asian financial crisis and the 2008 Global economic crisis on the capital structures of Korean non-financial listed companies. Using a panel data covering 1,159 Korean listed non-financial firms from 10 industrial sectors over a 31-year period (1985-2015), this study investigates the patterns of firms' capital structures before and after the crises and identifies their speeds of adjustment toward the optimal leverage. This study finds different effects of the two crises on both capital structures and adjustment speeds. The average debt ratio fell significantly after the 1997 Asian financial crisis. The distance between the optimal and the observed debt ratios shrank after the Asian crisis, while the speed of adjustment increased two-fold. Unlike the Asian financial crisis, the global economic crisis of 2008 had a positive effect on companies' debt ratios and the speeds of adjustments toward the optimal leverage. Our empirical analysis shows that, on average, the Korean non-financial listed companies decreased their debt ratios over the entire period of observation, with the leverage being the highest before the Asian financial crisis and lowest after the global economic crisis. Our results also show that the debt ratios of Korean chaebols were higher than that of non-chaebols. Moreover, we find that the high level of leverage of Korean firms was associated with tangible assets, income variability, size and age of the firm, non-debt tax shield and uniqueness.