• Journal of the Korea Academia-Industrial cooperation Society
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• v.18 no.4
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• pp.135-142
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• 2017

This study employs an analytical mathematical model to estimate the optimal debt ratio of Korean agricultural corporations, more sensitive to the government debt ratio policy compared to other industries, and the estimation of the optimal debt ratio based on objective data. The analytical model utilizes the equation for ROE, with the debt ratio as an independent variable, and related parameters include ROS, TAT, and NFCL. Regarding the NFCL, the optimal debt ratio standard is defined as the debt ratio that maximizes the ROE by analytical procedures such as adding an equation concerning the debt ratio and a linearity relationship to the analytical model, and from these equations, a quadratic equation with the debt ratio as an independent variable describes the ROE. This methodemploys fourteen years of corporate data. Results show that 138% of debt ratio is the optimal debt ratio to increase the ROE of the corporations, which implies that the existing debt ratio of Korean agricultural corporations is higher than optimal. Consequently, it is required for authorities to change future debt ratio policies in view that the purpose of debt ratio management is to maintain safety and increase profitability.Management should emphasize characteristics of the specific industry rather than standardized judgements based on numerical indexes.

• Journal of the Korea Academia-Industrial cooperation Society
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• v.19 no.3
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• pp.301-308
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• 2018

This study explores an analytical mathematical model designed to estimate the optimal debt ratio of the Korean automobile industry, which has a more significant effect on the national economy than that of other industries, and attempts to estimate the optimal debt ratio based on objective data. The analytical model is based on ROA and ROE which uses the debt ratio as an independent variable and employs ROS, TAT, and NFCL as the related parameters. Regarding the NFCL, the optimal debt ratio is usually defined as the debt ratio that maximizes the ROA and ROE and is calculated using analytical procedures, such as by adding an equation that considers the debt ratio and the linearity relationship to the analytical model. This is because the optimal debt ratio can be calculated reliably by making use of an estimated value within a certain range, which is derived from more than two calculations rather than a single estimation starting from one calculation formula. In this study, for the estimation of the optimal debt ratio, the ROA and ROE are expressed as a quadratic equation with the debt ratio as the independent variable. Using this analysis procedure, the optimal debt ratio obtained using the data from the Korean automobile industry over a sixteen year period, which would optimize the profitability of the Korean automobile industry, was found to be 188% of the debt ratio in the ROA and 213% of the debt ratio in the ROE. This result was obtained by overcoming the problem of the reliability of the estimation value in spite of the limitations of the logical theory of this study, and can be interpreted as meaning that maintaining a debt ratio of 188% to 213% can enhance the profitability and reduce the risks in the Korean automobile industry. Furthermore, this indicates that the existing debt ratio of the Korean automobile industry is lower than the optimal value within the estimated range. Consequently, it is necessary for corporations to change their future debt ratio policies, given that the purpose of debt ratio management is to maintain safety and increase profitability, and to take into account the characteristics of the specific industry.

• The Journal of Asian Finance, Economics and Business
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• v.7 no.11
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• pp.835-842
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• 2020

The study aims to investigate the impact of debt on corporate profitability in the context of Vietnam. The paper investigates the impact of debt on corporate profitability in non-finance listed companies on the Vietnam stock market. The panel data of the research sample includes 118 non-financial listed companies on the Vietnam stock market for a period of nine years, from 2009 to 2017. The Generalized Method of Moments (GMM) is employed to address econometric issues and to improve the accuracy of the regression coefficients. In this research, corporate profitability is measured as the return of EBIT on total assets. The debt ratio is a ratio that indicates the proportion of a company's debt to its total assets. Firm sizes, tangible assets, growth rate, and taxes are control variables in the study. The empirical results show that debt has a statistically significant negative effect on corporate profitability. The result also shows this effect is stronger in a non-linear (concave) way, we show that the debt ratio has nonlinear effects on corporate profitability. From this, experimental evidence shows that the optimal debt ratio is 38.87%. This evidence provides a new insight to managers of the non-finance companies on how to improve the firm's profitability with debt.

• Journal of Navigation and Port Research
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• v.39 no.1
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• pp.69-75
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• 2015

The concrete purpose of this study is to suggest actually a debt ratio to optimize the capital structure providing a kind of approach to estimate the proper debt ratio with an analytical model and empirical data in Korean shipping industry. The mathematical and analytical model is started from the first equation about ROE, return of net operating income on equity, with an independent variable, debt ratio. It is constructed with several parameters, ROS(return of operating income on sales), TAT(total assets turnover), and NFCL(net finance cost to liabilities). There could not be a certain relationship between debt ratio and ROS or TAT, while some correlation or causality between debt ratio and NFCL. In other words, most of firms with high debt ratio is likely to burden higher finance cost than others with low one. In this case, there is a linearity relationship between debt ratio and NFCL, so then the second equation considering this relation could be included within the analytical approach of this paper. To be short, if the criteria of adequate debt ratio has to be defined as some level of debt ratio to optimize ROE, the ROE could be illustrated as a quadratic equation to debt ratio from two equations. Next, this research estimated those parameters' numbers through the single regression method with data over 12 years of Korean shipping industry, and identified empirically the fact that optimal debt ratio would be approximately 400%. To conclude, if that industry's sales and operating incomes are stable, the debt ratio could be accepted until twice of 200% had forced in order to guarantee its financial safety in past time.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.1
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• pp.45-52
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• 2021

The capital structure is one of the hot financial topics among researchers and scholars. Its importance comes from the fact that capital structure is closely related to companies' ability to meet different stakeholders' needs. A suitable capital structure will boost the business and create a competitive advantage in the context of fierce competition. Many companies choose an optimal debt level based on the trade-off between interest and debt costs. This study aimed to test the existence of trade-off theory in capital structure, the case of Vietnam's real estate companies, which are growing very fast recently. Instead of considering constant optimal leverage to test the trade-off model, we take advantage of the dynamic capital structure determined by growth opportunities, profitability, tax incentives, tangibility, liquidity, and firm size. The dynamic panel data regression was estimated by the system Generalized Method of Moment (Sys-GMM). The empirical evidence showed that real estate companies listed in the Vietnamese stock market might change their leverage toward a target capital structure determined by influential factors in a long-term perspective. In particular, the debt-to-asset ratio will change by approximately 14 percent, positively, in response to the difference between the current debt-to-asset ratio and the dynamic target debt-to-asset ratio.

• KDI Journal of Economic Policy
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• v.38 no.3
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• pp.79-106
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• 2016

This paper investigates the effectiveness of public credit guarantee programs and interest-support programs for SMEs (small and medium enterprises). First, assuming that there is an imperfect information structure in the SME loan market, we analyze how SME support financial programs affect the corporate decisions made by SMEs with regard to default or loan sizes. In addition, this paper theoretically computes the optimal levels of credit guarantee amounts and the interest-support spread under equilibrium with imperfect information in a competitive loan market. Second, the paper empirically analyzes the continuous policy-treatment effect with the GPS (generalized propensity score) method. In particular, we consider the ratio of guaranteed debt to the total debt as a continuous policy treatment. The empirical results show that marginal effects of a credit guarantee on SMEs' productivity, profitability, and growth potential decrease with the ratio of guaranteed debt to the total debt. In addition, the average effect of a credit guarantee is maximized when this ratio is at 50% to 60%.

• Journal of the Korea Academia-Industrial cooperation Society
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• v.18 no.4
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• pp.163-174
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• 2017

This study analyzed how Korean firms' recapitalization affects their capital structure decision and firm value. Recapitalization was categorized into three groups according to the influence of the debt to equity ratio: debt ratio-increasing-recapitalization(capital reduction with refund, cash dividend), debt ratio-unchanging-recapitalization (capital reduction without refund, retirement of repurchased stocks), and debt ratio-decreasing-recapitalization(exercise the rights for convertible bonds, bond with stock warrants, exchangeable bonds and stock options). This article highlights how the relationship between the firms' recapitalization and the capital structure decision driven by the change in debt to equity ratio through the recapitalization should affect the firm value. The whole recapitalization sample used for this analysis comprised 22,814 enterprises listed on the Korea Exchange that were analyzed over the 16-year period from 2000 to 2015. To summarize the results of this Panel Data Analysis, firstly, when a firm executes debt ratio-increasing-recapitalization and debt ratio-decreasing-recapitalization at the period of t-1, the debt to equity ratio, which is increased or decreased, should affect the firm's debt capacity in the same period, then, at the period of t, the firm establishes a leverage policy to readjust the debt to equity ratio the other way around. These adjustments of debt-paying-ability from the leverage policy, including the capital structure decision, finally affect the firm value. Secondly, when a firm implements the debt ratio-unchanging-recapitalization in the period of t-1, the debt to equity ratio, which is neutral, should not affect the firm's capital structure decision. But, the firm value is positively affected by the influence of that recapitalization. Conclusively, we acknowledge a firm which carries out the recapitalization balances its capital structure to the optimal level of leverage and that the capital structure decision positively affects the corporate value.

• The Journal of Asian Finance, Economics and Business
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• v.6 no.2
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• pp.15-24
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• 2019

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.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.11
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• pp.213-221
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• 2021

The paper attempts to investigate the optimal capital structure of Vietnamese listed firms based on a structural approach. Using the data from around 70 companies in the Consumer Staples sector listed on the Vietnamese Stock Exchange during the period 2018-2020, this study finds that the optimal capital structure of examined companies has a wide range of diversification. This can be explained by the various types of actual products for each typical firm within the chosen sector. The result also confirms that a large proportion of researched firms were actually overleveraged, which is consistent with the trade-off hypothesis that firms wish to take tax advantages while using more debt, which creates the benefits from tax-shield. Furthermore, the research highlights the reversed correlation, which suggests that the lower the company's risk (the lower the sigma of the assets), the greater the optimal capital structure is suggested. Another interesting finding is that almost all consumer staples companies have a better optimal capital structure under the Leland and Toft (1996) model than under the Leland (1994) model. Furthermore, there is a strong correlation of optimal financial leverage ratio between years. In other words, the optimal debt levels of the latter year are strongly dependent on the gearing levels of the previous years.

• Environmental and Resource Economics Review
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• v.23 no.4
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• pp.643-665
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• 2014

We study the optimal policy of the contracual arrangement in raising the debt-to-equity ratio for oil, gas and mining project finance deals. We investigate the impact of the optimal contractual relationship between counterparties on the soundness of projects, differing in output price volatility and country risk. Key findings are: first, the existence of EPC sponsors and off-takers generally raises the debt-to-equity ratio. In particular, EPC sponsors and off-taking sponsors jointly mitigate the credit risk caused by counntry risk. Seocond, off-taking and EPC contracts jointly help mitigate the credit risk caused by the country risk, rather than the price volatility. Indeed, the contractual structure raises the debt-to-equity ratio.