Affiliation:
1. IE Business School IE University Spain
2. College of Business Administration Seoul National University South Korea
3. HKUST Business School The Hong Kong University of Science and Technology Hong Kong
Abstract
AbstractDuring the 1997 Asian financial crisis, Korean regulators imposed a 200% leverage cap to curb excessive debt and restore economic stability. We examine the real effects and externalities of mandated capital structure changes resulting from this leverage ratio regulation. Our findings indicate that firms that met the leverage requirement experienced a significant decrease in firm risk. However, the effect varied depending on how firms adjusted their capital structure. Firms that chose to issue equity to lower their leverage ratio, as opposed to firms repaying debt, exhibited higher firm risk, lower investment‐q sensitivity, and lower profitability in the post‐regulation period.