This research investigates the factors influencing the capital structure of 271 non-financial firms listed on the Korean Stock Exchange (KSE) over a broad period from 1995 to 2021, encompassing both stable and crisis conditions. Employing a dynamic panel data model and the generalized method of moments (GMM) estimation, we address the endogeneity issue introduced by the inclusion of lagged dependent variables. Our research integrates firm-specific internal factors with macroeconomic external variables to provide a comprehensive understanding of the influence of varying economic environments on capital structure. Our study suggests that in times of economic stability, the capital structure decisions of a firm are more influenced by internal factors such as profitability. However, in periods of economic downturns, it is the external macroeconomic market conditions that tend to have a greater impact on these decisions. It is also noteworthy that both book leverage (BL) and market leverage (ML) exhibit quicker adjustments during stable periods as opposed to periods of crisis. This indicates a higher agility of firms in adapting their capital structures in stable, normal conditions. Our findings contribute to the existing literature by offering a holistic view of capital structure determinants in Korean firms. They underscore the necessity of adaptable financial strategies that account for both internal dynamics and external economic conditions. This study fills a gap in current research, presenting new insights into the dynamics of capital structure in Korean firms and suggesting a multifaceted approach to understanding capital structure in diverse economic contexts.

This research conducts a meticulous examination of the determinants influencing dividend payout dynamics among firms listed on the Korean Stock Exchange (KSE) from 1995 to 2021, a period characterized by profound economic fluctuations. By leveraging a dynamic panel data model and the Generalized Method of Moments (GMM) for estimation, the study addresses endogeneity concerns while exploring the effects of firm-specific and macroeconomic variables on dividend yields. The investigation delineates three distinct economic phases: normal conditions, financial crises, and the aggregate study period, facilitating a granular understanding of firms’ dividend payout adaptability under varying economic landscapes. Empirical findings underscore the persistence of dividend payments, revealing a variable adjustment speed toward target dividend yields contingent upon the economic context, with an expedited adjustment observed during crises. Crucially, firm profitability emerges as a consistent determinant of dividend yields across all examined periods, whereas the influence of macroeconomic variables is notably more pronounced during periods of economic normalcy. This research elucidates the complex interplay between internal corporate strategies and external economic pressures in shaping dividend policies, thereby enriching the discourse on dividend payout behavior in the context of Korea’s economic evolution from an emerging to a developed market.

As portfolio insurance played a market amplification mechanism in 1987 Black Monday. leverage played a similar role in recent credit crisis that initiated from the United States of America. In addition, unsophisticated regulations as well as securitization made matters worse, since they also included ingredients of market amplification mechanisms. As far as leverage is concerned, it tends to magnify the return on equity. As a result, leverage moves together with the size of asset; when the asset size goes up, financial institutions such as investment banks use more leverage, but when the size of asset falls, they are forced to reduce leverage. In the falling market, regulations like marking to market and VaR would aggravate the market fall in terms of amplification mechanism. Based on Krugman's idea(2008), I propose the model where leverage plays a key role in amplifying the market in terms of the risky asset. In so doing, I assume that there are two players in the market, one is the aggressive investor who is willing to use leverage, and the other is the defensive investor who could be thought as a normal risk-averse investor. According to the model, the equilibrium price of risky assets rises with more leverage when the size of risky assets becomes larger, but falls with de-leveraging when the size of risky assets shrinks. I have also found two interesting portfolio implications when the aggressive investor becomes a representative agent; one, the optimal portfolio selection is influenced by the size of risky assets, and two, despite the fact that the aggressive investor is assumed to be risk-neutural, we end up having the optimal portfolio choice that is very similar to that of the mean-variance framework. The latter indicates that the aggressive investors, due to VaR constraint, make choices in such a way that they use more leverage in booming market, but follow the deleveraging process in falling market. Note that investment banks can be thought of as the aggressive investors. The statistics from 1992 to 2008 show that investment banks use leverage pro-cyclically, meaning that in booming market when the size of risky assets goes up, the investment banks use more leverage, but in falling market when the size of risky assets falls, they do deleveraging. This has an interesting implication from central banks' perspectives as well. If one of central banks' goals needs to pursue the stability of financial markets, they need to be concerned about the size of financial institutions' balance sheet. This is due to the fact that the size of risky assets tend to move together with business cycle, and so does leverage. Many central banks have recently changed their approaches of price stability from ‘Inflation Targeting' to ‘Monetary Targeting.' However, my study shows that ‘Monetary Targeting' appears a superior approach in the sense that it could better reflect the size of financial institutions' balance sheet. Recent credit crisis originated from the United States is challenging the modelling framework based on new classical economy. Although capital markets turn out not to be perfect unlike what we used to think before the crisis, the modelling framework based on the new classical economics won't be able to explain the crisis, not to mention predicting it. Some say that it is time to revive Keynesian economics, and others argue that we need a model which can incorporate more realistic features of economic realities thanks to the recent development of computer simulation. I think that it is still early to answer this question, though. By the model that I propose in the paper, I could explain a part of recent credit crisis, especially in terms of market amplification mechanism intrigued by leverage.

This study explores the capital structure determinants of Korean firms over an extensive period (1995-2021), encompassing both stable and crisis conditions. Employing a dynamic panel data model and the Generalized Method of Moments (GMM) estimation, we address the endogeneity issue introduced by the inclusion of lagged dependent variables. Our research integrates firm-specific internal factors with macroeconomic external variables to provide a comprehensive understanding of the influence of varying economic environments on capital structure. Our study suggests that in times of economic stability, the capital structure decisions of a firm are more influenced by internal factors such as profitability. However, in periods of economic downturns, it's the external macroeconomic market conditions that tend to have a greater impact on these decisions. It's also noteworthy that both book leverage (BL) and market leverage (ML) exhibit quicker adjustments during stable periods as opposed to periods of crisis. This indicates a higher agility of firms in adapting their capital structures in stable normal conditions. Our findings contribute to existing literature by offering a holistic view of capital structure determinants in Korean firms. They underscore the necessity of adaptable financial strategies that account for both internal dynamics and external economic conditions. This study fills a gap in current research, presenting new insights into the dynamics of capital structure in Korean firms and suggesting a multifaceted approach to understanding capital structure in diverse economic contexts.