This paper hypothesizes that firms will employ different financing policies depending on the level of cash from operations and the source of cash requirements, and empirically analyzes the hypothesis using 3.628 firm-year observations. The paper also ...
This paper hypothesizes that firms will employ different financing policies depending on the level of cash from operations and the source of cash requirements, and empirically analyzes the hypothesis using 3.628 firm-year observations. The paper also empirically examined whether the pecking order theory and the static tradeoff theory work well for the Korean firma. Meat of the Korean firms are highly leveraged. Therefore, the paper hypothesizes that especially the pecking order theory will not work well in explaining the financing policies of the Korean firms. This paper documents that the Korean firms finance cask requirements in the order of cash inflows from investment activities, cash flows from operations and cash inflows from financing activities. The results indicate that the pecking order theory fails to explain the financing policies of the Korean firms, and that we need to include in the financing model not only debt financing variable but also other major variables like cash inflows from investment activities and equity financing. The static tradeoff theory has a relatively high explanatory power than the pecking order theory for the Korean firms. However, care should be taken in interpreting the results since the static tradeoff model is likely to have a high explanatory power by construction since it uses a three-year moving average debt ratio as target debt ratio. One of the major finding of the study suggests that the Korean firms tend to employ matching financing policy. In other words, with large capital expenditures depend heavily on cash inflows from investment activities while firms with large debt redemption requirements depend heavily on cash inflows financing activities. I dichotomized the sample into pre- and post-financial crisis period groups, big and small firm groups, tight and loose financial slack groups, and be forth and reran the tests for sensitivity analyses. The results were robust irrespective of many sensitivity analyses.