Foreign Ownership and Capital Structure in Times of Crises: Case of South Korea (S.S. Islamova, M.S. Kokorev, сетевое издание "Электронный журнал "Корпоративные финансы" Journal of Corporate Finance Research", N 2, 2022 г.)

Islamova S.S., Kokoreva M.S. Foreign Ownership and Capital Structure in Times of Crises: Case of South Korea

S.S. Islamova - Financial Analyst, Ernst & Young - National University Higher School of Economics, Moscow

M.S. Kokorev - Candidate of Economic Sciences, Associate Professor of the School of Finance, Research Fellow, Laboratory of Corporate Finance, National Research University Higher School of Economics, Moscow

This paper presents the results of analysis of the role of foreign investors in capital structure choice. The analysis is conducted using regression analysis of panel data. Operating with data of 809 companies listed in the South Korean market in 1997-2020, we demonstrate that the debt-to-equity ratio of companies with foreign investors is lower than in the rest of the firms. In this case, foreign investors' monitoring of a company's performance can be a substitute for debt financing as a disciplining mechanism for management. Foreign investors also indirectly affect the capital structure by impacting the speed of adjustment to the target leverage. The results of our study show that the speed of adjustment to the target debt-to-equity ratio increases along with a rise in foreign investor participation. The results are most pronounced for over-leveraged firms. Whereas during financial crises, we observe no effect of the presence of foreign investors on the changes in the target debt-to-equity ratio, we find a significant increase in the speed of adjustment to the target leverage in companies with foreign investors. During the current coronavirus crisis, corporate debt of companies with foreign investors is decreasing even more, while the speed of adjustment decreases. We attribute these effects to the non-financial nature of the crisis, which makes the role of foreign investors in monitoring management less meaningful. In practice, results can be used by company managers when facing crises or other macroeconomic shocks. The results obtained can also be used by public authorities in shaping policies to stimulate foreign investment.

Keywords: capital structure, foreign ownership, crisis, dynamic trade-off theory, South Korea