Determinants of capital structure: Evidence from korean banks

Abstract

This paper examines empirically the determinants of capital structure of Korean banks. The results suggest there may be great similarities in the determinants of capital structure between banks and non-financial firms. Most determinants on bank capital structure appear to be very consistent with the estimates found for non-financial firms. Overall, we found that Korean banks' capital structure measured by debt-to-asset ratio is negatively related to bank profitability, loan ratio, and payout ratio for both periods of 1994-1996 (pre-crisis period) and 2001-2008 (post-financial crisis period). However, bank asset size shows a more complicated effect on debt ratio than it is hypothesized in literature. It is differently related to debt ratio depending on market environment and regulation in banking industry. Bank asset size is positively related to debt ratio before the financial crisis which is the same as the standard hypothesis in the literature, however, it is changed into a negative relation after the financial crisis. This result can be understood by considering that merger and acquisition of unhealthier and smaller banks by larger banks is one of the main instruments of Korean banking reforms to overcome the financial crisis. Under the period of 1997-2000, however, most variables are insignificant, suggesting that Korean banks did not have any meaningful mechanism for capital structure decision over this period. © Seok Weon Lee, 2013.