Capital Structure and Firm Value in Korea: Addressing Endogeneity and Nonlinear Effects of Liabilities
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Abstract
This study investigates how corporate liabilities affect firm value by distinguishing between liability levels and changes, as well as between increases and decreases in liabilities, using non-financial firms listed on the Korean stock market from 2011 to 2023. Firm value is measured by Tobin’s Q and its year-over-year change, while liabilities are represented by static leverage ratios and dynamic liability growth measures. Employing linear, nonlinear and asymmetric specifications, the analysis reveals several key findings. Higher liability levels are generally associated with lower firm value, consistent with financial distress and agency cost arguments. In contrast, moderate increases in liabilities are positively related to changes in firm value, suggesting that debt expansion may signal growth opportunities. Nonlinear results indicate an inverted U-shaped relationship between liability changes and firm value, implying diminishing marginal benefits of debt growth. Furthermore, asymmetric analyses show that liability reductions have a stronger negative valuation effect than comparable liability increases, reflecting investors’ greater sensitivity to downside risk. Overall, the findings demonstrate that the valuation effects of corporate liabilities are dynamic, nonlinear, and asymmetric, underscoring the importance of managing both the level and adjustment of liabilities in corporate financing decisions.
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