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Cited by 31Corporate Finance and GovernanceFinancial Distress and Bankruptcy PredictionWorking Capital and Financial Performance

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Capital Structure and Default Risk: Evidence from Korean Stock Market

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Graduate School, Daejeon University, GUL, Sehrish, CHO, Hyun-Rae·2019·The Journal of Asian Finance, Economics and Business
DOI 10.13106/jafeb.2019.vol6.no2.15
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Abstract

This study analyzes the effect of the capital structure of Korean manufacturing firms on default risk based on Moody's KMV option pricing model where the probability of default is obtained by measuring the distance to default as a covariant in logit model developed by Merton (1974). Based on the panel data of manufacturing firms, this study achieves its primary objective, using a fixed effect regression model and examines the effect of a firm's capital structure on default risk amongst publicly listed firms on Korea exchange during 2005-2016. Empirical results obtained suggest that the rise in short-term debt to assets leads to increase the risk of default whereas the increase in long-term debt to assets leads to decrease the default risk. The benefits of short-term debt financing over a short-term period fade out in the presence of information asymmetry. However, long-term debt financing overcomes the information asymmetry and enjoys the paybacks of tax advantage associated with long-term debt. Additionally, size, tangibility and interest coverage ratio are also the important determinants of default risk. Findings support the trade-off theory of capital structure and recommend the optimal use of long-term debt in a firm's capital structure.

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Metadata

Authors
Graduate School, D. U., GUL, S., & CHO, H.-R.
Affiliations
Daejeon University (KR)
ORCID
GUL, Sehrish
Venue
The Journal of Asian Finance, Economics and Business
Publisher
Korea Distribution Science Association
Published
2019-04-30
Volume
6
Issue
2
Pages
15-24
ISSN
  • 2288-4637 (ISSN-L)
  • 2288-4645
DOI
10.13106/jafeb.2019.vol6.no2.15
OpenAlex
W2945278921
Cited by
28
References
0
Citations by year
2026: 1 · 2025: 3 · 2024: 9 · 2023: 5 · 2022: 3 · 2021: 1 · 2020: 6
FWCI
6.38
Type
journal article
Language
en
Open access
Locations
Journal of Asian Finance Economics and Business (publishedVersion)
Topics
  • Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
  • Social Sciences › Business, Management and Accounting › Accounting › Financial Distress and Bankruptcy Prediction
  • Social Sciences › Business, Management and Accounting › Accounting › Working Capital and Financial Performance
Keywords
capital structure, default risk, distance to default, KMV model, short-term debt, long-term debt, information asymmetry, tax advantages, trade-off theory, interest coverage ratio, firm size, tangibility, manufacturing companies, Korean stock market

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Graduate School, D. U., GUL, S., & CHO, H.-R. (2019). Capital Structure and Default Risk: Evidence from Korean Stock Market. The Journal of Asian Finance, Economics and Business. https://doi.org/10.13106/jafeb.2019.vol6.no2.15