Capital Structure Changes in Korea from 1981 to 2005: Evidence and Implications

Abstract

I investigated the questions of how the debt ratios in Korean companies have changed over the last 25 years and how the functional relationship with explanatory variables has changed over the same period. Using both the well-known model by Rajan and Zingales (1995) and the annual data, I examined the applicability of the preceding model to the Korean data and the existence of the possible nonlinearity depending on firms' debt ratio. After transforming the initial year-by-year data into a form of the unbalanced panel data, I further explored the same two questions from time-series and cross-sectional perspectives. Test results confirmed the necessity of considering nonlinearity between debt ratio and explanatory variables in the future research.