Capital Structure Dynamics: Evidence from the Korean Listing Market

Abstract

This study analyzes how the trade-off theory, capital financing priority theory, and market timing hypothesis impact corporate capital structure for sustainable growth. Using a panel regression and system generalized method for moment analyses with balanced panel data for 1636 listed firms in the Korean stock market and KOSDAQ from 2011 to 2021, we discovered that the level of and change in capital structure are determined through a complex mechanism in which the target debt ratio adjustment speed, previous year’s debt ratio, target debt ratio divergence, funding shortage situation, and market timing hypothesis interact complementarily. This indicates that the capital structure decisions of Korean listed firms are characterized by a complex mechanism that is difficult to explain with a single theory. The findings of this study have practical implications for understanding the capital structure decisions of Korean firms and for designing efficient capital-raising strategies. Additionally, by revealing the complementary relationship between the two theories, this study provides directions for future research on corporate capital structure.