Investment opportunity set, capital structure and dividend policies in Korea

This paper examines explanations for the association among investment opportunity set, capital structure and dividend policies, using Korean firm data. The empirical analysis in this study employs Parks model (1967) to overcome the methodological problems of the first-order autocorrelation and contemporaneous correlation with firm panel data. The empirical results indicate that firms with more investment opportunities have lower leverage and dividends. The results are consistent with contracting theory predictions but are inconsistent with signaling and/or tax-based theory predictions of how the investment opportunity set should affect the corporate financial policy choices. It appears that size variable is statistically significant but regulation intensity and industry characteristics are insignificant in explaining the cross-sectional differences in corporate financial policy choices.