Determinants of Leverage in Korea

The purpose of this study is to empirically examine the determinants of leverage in Korea. The study is conducted using 2005-2015 sample period and data of 563 listed companies in the Korean securities market. It analyzes the relationship between leverage and profitability (return on equity), liquidity (current ratio), tangibility (tangible fixed asset to total asset ratio), growth opportunity (sales growth rate), size (log of total asset), age (dummy variable from 0 to 10) and the leverage of the previous year through multiple regression analysis. In order to investigate the effect of the financial crisis on leverage, the study examines whether there is a significant difference between the average leverage in the financial crisis period and the non-financial crisis period through t-test. Regression analysis shows that there is a significant negative correlation between leverage and profitability, leverage and age. Leverage has a statistically significant positive correlation with previous leverage and firm size. On the other hand, no statistical significant relationship was found between leverage and liquidity, tangibility and growth opportunities. The difference between the average leverage before and after the financial crisis was only partially found in the comparison between the 2015 financial crisis period and the 2014 non-financial crisis period, but no significant difference was found between the rests of the periods.