Dynamic Capital Structure Adjustment: An Integrated Analysis of Firm-Specific and Macroeconomic Factors in Korean Firms

SungSup Brian Choi (), Kudzai Sauka and MiYoung Lee
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SungSup Brian Choi: Business Management Department, State University of New York (SUNY), Incheon 21985, Republic of Korea
Kudzai Sauka: Amsterdam University of Applied Sciences, 1091 GM Amsterdam, The Netherlands
MiYoung Lee: Business Management Department, Seoul National University of Science and Technology, Seoul 01811, Republic of Korea

IJFS, 2024, vol. 12, issue 1, 1-16

Abstract: This research investigates the factors influencing the capital structure of 271 non-financial firms listed on the Korean Stock Exchange (KSE) over a broad period from 1995 to 2021, encompassing both stable and crisis conditions. Employing a dynamic panel data model and the generalized method of moments (GMM) estimation, we address the endogeneity issue introduced by the inclusion of lagged dependent variables. Our research integrates firm-specific internal factors with macroeconomic external variables to provide a comprehensive understanding of the influence of varying economic environments on capital structure. Our study suggests that in times of economic stability, the capital structure decisions of a firm are more influenced by internal factors such as profitability. However, in periods of economic downturns, it is the external macroeconomic market conditions that tend to have a greater impact on these decisions. It is also noteworthy that both book leverage (BL) and market leverage (ML) exhibit quicker adjustments during stable periods as opposed to periods of crisis. This indicates a higher agility of firms in adapting their capital structures in stable, normal conditions. Our findings contribute to the existing literature by offering a holistic view of capital structure determinants in Korean firms. They underscore the necessity of adaptable financial strategies that account for both internal dynamics and external economic conditions. This study fills a gap in current research, presenting new insights into the dynamics of capital structure in Korean firms and suggesting a multifaceted approach to understanding capital structure in diverse economic contexts.

Keywords: dynamic capital structure; capital structure determinants; GMM estimation; adaptable financial strategies (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
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