Why companies have low debt? An empirical evidence in Korea

The aim of this study is to examine the reasons why companies have been borrowing less, which has become increasingly popular recently. The study uses the method developed by Agrawal and Nagarajan, 1990Agrawal A. Nagarajan N.J. Corporate capital structure, agency costs, and ownership control: The case of all-equity firms.The Journal of Finance. 1990; 459: 1325-1331Google Scholar to select unlevered and levered companies for comparison to identify the causes of low leverage. The results of empirical analysis indicate that first, companies with low debt levels are relatively profitable, have high internal reserves, and possess future growth opportunities. Second, unlevered companies exhibit higher economic value compared to levered companies. Debt does not improve company value through low cost of capital or higher cash flow via tax shield. Third, family ownership tends to prefer low debt levels. Finally, unlevered companies have higher cash holding compared to levered companies, and this trend is maintained over long period of time. The preference for higher cash among unlevered companies has a historical basis. The companies are maintaining low debt levels for future growth opportunities and their management preference for high level of cash has remained consistent over time.