Dynamics of Capital Structure: The Case of Korean Listed Manufacturing Companies

In this paper, we develop a model of dynamic capital structure choice based on a sample of Korean manufacturing firms and estimate the unobservable optimal capital structure using a wide range of observable determinants. Uunbalanced panel data of Korean listed firms for the period 1985 to 2002 is used. In addition to identifying and estimating the effects of the determinants of capital structure, we take into consideration some Koreaspecific features, such as the structural break before and after the financial crisis and firms’ affiliation to chaebol business groups. Our results indicate that the optimal capital structure has been affected by the financial crisis. While the results suggest that chaebolaffiliated firms have higher optimal level of leverage and adjust their capital structure faster than non-chaebol firms, firms’ leverage may be associated with factors other than chaebol-affiliation, such as size, profitability and growth opportunity.