Debt Policies for Korean SMEs After the US Financial Crisis in 2007

Purpose: Prosperity of SMEs is a national concern in Korea. Although easy financing is important for SMEs, it is the greatest barrier for them. We, therefore, study the financing policies for Korean SMEs.

Methodology: We try to explain Korean SMEs’ financing patterns during a 10-year window, using the trade-off and pecking order theories. We use 1,501 SMEs from KOSPI and KOSDAQ markets. These SMEs are additionally segregated into 4 different sub-groups in line with their size. In addition, considering an endogeneity problem when using panel data, we hire LSDV and GMM estimators.

Finding: First, SMEs reduce debt levels for our three different types of debt levels long- and short-term debt, and total debt. Second, some variables, such as tangible assets, cash level and financial deficits, indirectly present that different financing policies (or theories) are applied when SMEs are financing between short- and long-term debt. Third, although we have not found a compelling evidence in statistical terms that SMEs adjust their debt levels toward optimal, continuous reducing of debt level during our sample period is a strong evidence of the trade-off theory.

Implication: Both trade-off and pecking order theories partially explain Korean SMEs’ financial policies but not entirely. The reason is, we believe, that our models are not enough to represent the verities of SMEs’ characteristics.