Capital Structure Adjustment: Evidence from the Korean Financial Market

The existence of capital structure adjustment costs potentially influences the test of the trade-off theory of capital structure. We analyze whether there exist economically meaningful adjustment costs in the Korean financial market. We adopt the duration analysis of Leary and Roberts (2005) to estimate the hazard rate of capital structure adjustments. The publicly traded firms listed in the KOSPI market are examined from 2000 to 2016. Our empirical analysis finds inactive capital structure adjustments for the listed Korean firms, consistent with the U.S. evidence. However, our duration analysis emphasizes the significant role of fixed adjustment cost in the determination of capital structure adjustments, in contrast to the existing studies emphasizing both of fixed and convex cost components. This paper verifies the existence of capital structure adjustment costs for the publicly traded Korean firms. Yet, our results argue for the importance of fixed adjustment costs in capital structure decisions, unlike the existing studies.