The capital structure of domestic and foreign denominated debt: Firm-level evidence from South Korea

This study uses a two-part model with firm-level fixed effects to examine the decisions of Korean firms to issue domestic and foreign denominated debt (extensive margin), and among those firms using external finance, their level of leverage (intensive margin) in each denomination. We find that less profitable and fast-growing firms adopt a pecking order in their leverage decisions, which is evident in their preference for domestic, relative to foreign denominated debt. Interestingly, this relation is shown to be stronger following the 2007 financial crisis and suggests demand side factors are important to leverage decisions. Our results also indicate the fixed costs of issuing debt are important to debt use along the extensive margin and vary in strength by denomination. The use of foreign debt, with its higher fixed costs, is shown to be largely determined by factors associated with these costs.