Do Firms Rebalance Capital Structure? Evidence from Korean Retail Firms

The existence of capital structure adjustment costs affects the test of the trade-off theory of capital structure significantly. We analyze whether there exist economically significant capital adjustment costs for the Korean retail firms. We use the duration model of Leary and Roberts (2005) to estimate the hazard rate of capital structure adjustments. The publicly traded retail firms listed in the KOSPI and KOSDAQ markets are analyzed from 2000 to 2016. Our empirical analysis finds infrequent capital structure adjustments for the Korean retail firms, which is in line with the U.S. evidence. However, our duration analysis argues that the role of fixed adjustment cost is important in the determination of capital structure adjustments, unlike the existing studies emphasizing both of fixed and convex cost components. This paper confirms the existence of capital structure adjustment costs for the Korean retail firms. However, our results argue for the significance of fixed adjustment costs in capital structure adjustments, inconsistent with the existing studies.