Firm size and different priorities in capital structure policy

Abstract

The objective of this study is to empirically examine how the bank capital structure policy is related to bank asset size. More specifically, by partitioning the full sample banks into two groups, i.e., the group of larger asset size banks vs the group of smaller asset size banks, we examine whether there is any difference in the determinants of capital structure decision between the two groups. Based on a panel regression analysis for Korean banks over the sample period 2000-2008, this study finds that the determinants for capital structure are substantially different between the two groups. Asset size and profitability affect the capital structure of the two groups in the same way. However, small banks’ capital structure decision shows that their capital ratio is positively related to both loan ratio and nonperforming loan ratio. This implies that small banks appear to put higher priority on investment policy for future growth than financial policy. The positive relation between nonperforming loan ratio and capital ratio for small banks implies that small banks have the tendency to decrease their debt ratio with financial risk-management purpose when their risk status measured by nonperforming loan ratio is high. However, both loan ratio and nonperforming loan ratio turned out not to affect the capital structure decision of the group of large banks. Instead the proportion of outside shareholdings which is used as the measure of the bank ownership structure turns out to negatively affect the bank capital ratio. Overall, these results imply that small banks tend to consider their investment opportunities and risk status as important explanatory variables for the capital structure decision. In contrast, large banks put a priority on the ownership structure in making capital structure decision. These results may suggest that to achieve a stable capital healthiness of the banks which is one essential requirement for the safety and soundness of the banking industry, bank regulator may have to implement a discriminatory regulatory policy between the group of large banks and small banks. Ignoring bank asset size and different characteristics, and imposing a one-way capital-structure regulatory policy would not be effective in making capital structure of the banks sound and healthy. © Seok Weon Lee.