The Determination of Corporate Debt in Korea

This paper explains the changes in leverage and debt structure of Korean firms during the period from 1981 to 1997. We find the financing decisions of Korean firms can be explained by the determinants suggested by corporate finance models. But, even when controlling for the proposed determinants, such as firm size, growth rate, tangible fixed assets, and profitability, there were major differences in the capital structure choices between chaebol and non-chaebol firms. The empirical findings show that chaebol-affiliated firms have higher leverage than non-chaebol firms in Korea. We also find that since 1989 the leverage of the 6-30th largest chaebol firms has continued rising to a level much higher than that of the five largest chaebol and non-chaebol groups, and that the five largest chaebol firms significantly increased leverage in terms of foreign financing.