Foreign Ownership and Capital Structure During Crises: Evidence From South Korea

The paper investigates the relationship between foreign ownership and capital structure. Foreign ownership is used as an explanatory variable of the leverage, proxy of the capital structure. The paper uses dynamic trade-off model of capital structure, where the influence of foreign ownership on the target is considered to be a direct effect and the influence on the speed of adjustment as an indirect effect. For the direct effect estimation, Generalized Method of Moments (GMM) is used, while for the indirect effect – Random Effect model is used based on the correlation tests. Direct effect: it is found that foreign ownership results in lower target levels of leverage with a larger effect for over levered companies, foreign ownership results in even lower leverage in crises periods. Indirect effect: the paper shows that foreign ownership increases speed of adjustment, with a larger impact for over levered companies. During financial crises foreign ownership increases the speed of active adjustment even more, while during the pandemic foreign ownership resulted in a reduction of the speed of active adjustment. The paper consists of introduction, five chapter and conclusion. Chapter 1 include literature review and derivation of hypotheses. Chapter 2 covers methodology, Chapter 3 discusses sample and data. Chapter 4 provides results discussion. Chapter 5 contains robustness test of the obtained results. Keywords: capital structure, foreign ownership, crisis, dynamic trade-off theory