Effects of Capital Market Access on Target Leverage and Adjustment: Empirical Analysis of Public and Private Firms in Korea

What the paper says

This paper examines how a firm’s access to different types of financing sources in capital markets affects its target leverage and the speed of adjustment to the target. Public equity (listed stock) and market-based debt (bond) are mainly taken into account as two main sources of capital of interest. Using a large data set of public and private firms in Korea, we classify the firms according to whether they have access to public equity (listed stock) and market-based debt (bond) in the capital markets. As the imbalance in number of observations and heterogeneity between public and private firms are substantial, we conduct empirical analyses with the matched sample as well as with the full sample. The findings of our paper show that different types of capital sources can have different implications on the firm’s target leverage, adjustment, and financing activities. A public firm tends to have lower leverage and adjusts to its target leverage faster than a private firm in Korea. A firm with access to bond market is shown to have higher leverage and adjusts faster to its target leverage than that without such access, regardless of whether the firms are public or private. Our paper also provides the findings that a public firm exercises more active issuance and retirement of capital than a private firm and that a firm with access to bond market, regardless of whether a firm is public or private, exercises more active issuance and retirement of capital than that without such access. This paper contributes to the literature on capital structure by integrating different types of capital sources in a single empirical framework and by providing new empirical findings based on the analysis of matched sample as well as full sample.