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Capital Structure Determinants among

Construction Companies in South Korea: A
Quantile Regression Approach
ARTICLE in JOURNAL OF ASIAN ARCHITECTURE AND BUILDING ENGINEERING JANUARY 2014
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Capital Structure Determinants among Construction Companies in South Korea:

A Quantile Regression Approach

Jae-Kyu Choi1, Seung-Kyu Yoo*2, Ju-Hyung Kim3 and Jae-Jun Kim4

1

Ph.D. Candidate, Department of Architectural Engineering, Hanyang University, Korea

Ph.D. Candidate, Department of Frontier Architectural and Urban Environmental Engineering, Hanyang University, Korea
3
Associate Professor, Department of Architectural Engineering, Hanyang University, Korea
4
Professor, Department of Architectural Engineering, Hanyang University, Korea

Abstract
The present study empirically analyzed the capital structure determinants of 43 listed construction
companies in Korea from 2000 to 2010 using multiple regression analysis. Specifically, the empirical
analysis focused on changes in the coefficients of the determinants according to the leverage ratio quantiles
of the examined construction companies. The empirical analysis found company and non-debt tax shield size
to be positively related with leverage among construction companies, whereas profitability, growth, asset
tangibility, and liquidity were found to be negatively related with leverage. The major results of the study
are: 1) construction companies followed the static tradeoff theory in relation to size; 2) non-debt tax shields
had quite limited effects on the capital-structure-related decisions of construction companies; 3) construction
companies were found to follow the pecking order theory in relation to profitability; and 4) asset tangibility
was estimated to have the opposite sign to that found in previous studies. These results were attributed to the
characteristics of the construction business.
Keywords: capital structure; construction company; quantile regression; South Korea

1. Introduction
The international financial crisis began with the
bankruptcy of Lehman Brothers Holdings, Inc., in the
United States (US) in September 2008. This event not
only caused a credit crunch in the US but also had a
negative effect on various countries (and industries)
worldwide. Moreover, the European sovereign debt
crisis of 2009 led to the expectation of long-term
macroeconomic downturns worldwide. Korea was also
affected by these unpredictable financial crises. Rapid
downturns in domestic businesses and decreasing
consumer sentiment spread to related industries and
greatly jeopardized individual businesses. In particular,
because it is very sensitive to domestic and foreign
market fluctuations (Kangari, 1988), the construction
industry faced decreases in investments in equipment
and construction, lowering real asset values, and a
slump in the housing construction market. These
*Contact Author: Seung-Kyu Yoo, Ph.D. Candidate,
CM/CIC Laboratory, Department of Frontier Architectural and
Urban Environmental Engineering, 4F, Gwahakgisulgwan,
Hanyang University, Haengdang-dong, Sungdong-gu,
Seoul, 133-791, Korea
Tel: +82-2-2220-0307 Fax: +82-2-2296-1583
E-mail: james_yoo@hotmail.com
( Received April 15, 2013 ; accepted November 11, 2013 )

consequently led to poor housing sales, decreased

profitability, exhausted working capital, and financial
liquidity crises (Jang et al., 2010). The liquidity crises
did not end after the short-term effects of the crisis
had been felt but led to company bankruptcies as well
as the subsequent bankruptcies of their cooperative
firms. A total of 403 construction companies (130
general contractors and 273 specialty contractors) went
bankrupt in 2008 alone.
In light of these unpredictable changes in the
macroeconomic environment, corporate-level coping
methods are limited. In particular, construction
companies may not always be financially sound
because of their tendency to rely on borrowed
capital, which can be regarded as a direct cause of
corporate-level financial difficulties (Severson et
al., 1993). In the case of Korea, a major cause of
excessive borrowing is thought to be the dependence
of construction companies on housing/real estate
development projects. It is believed that these
companies were unable to respond to liquidity crises
during the macroeconomic downturns because of the
types of projects they undertake, which require large
amounts of capital from banks/financial institutions
based on salability and the repayment of capital after a
grace period. In addition, the uncertainty of production
systems and the long project timelines resulting from
the characteristics of the construction industry are

Journal of Asian Architecture and Building Engineering/January 2014/100

93

known to cause many difficulties in the management

of these types of companies (Abidali and Harris, 1995,
Lee et al., 2013).
The structural problems mentioned above are causes
of discriminative treatment (loans at high interest rates,
requests for excessive collateral) against construction
companies by credit/financial institutions compared to
other industries. Accordingly, construction companies
are reducing their financial risks through management
strategies such as reinforcing their capabilities to
receive orders and developing overseas construction
markets. However, it is thought that construction
companies are likely to repeatedly become insolvent
in crisis situations unless their financial strategies are
fundamentally changed.
The decision-making process on capital structures
determines the use of borrowed capital1. Therefore, the
justification for the use of borrowed capital begins with
questions such as, "What types of decision-making
processes do construction companies use to determine
their capital structures?" and "What elements are
involved in capital-structure-related decisions?"
Many studies have been conducted in the fields of
business management/finance in order to theoretically
explain how businesses select their capital structures.
However, although the construction industry has very
large effects on the national economy, there are few
theoretical/empirical studies on how these companies
determine their capital structures. Furthermore,
understanding the determinants of excessively low
or high leverage among construction companies
is considered to provide important information in
identifying these companies' financial strategies.
Therefore, the present study aimed to conduct an
empirical analysis of the capital structure determinants
among listed Korean construction companies and identify
the determinants according to capital structure quantile.
The study's results are considered to provide basic
information to construction companies, banks/financial
institutions, credit rating agencies, and individual
investors and help construction companies make
decisions on the formation of their capital structures.
2. Literature Review
2.1 Capital Structure Theories
Theories regarding the determination of capital
structures at the corporate level include the static
tradeoff and pecking order theories. The static tradeoff
theory of Modigliani and Miller (1958) assumes that
businesses will borrow capital until the tax savings
effect from borrowing additional capital equals the
borrowing costs because the probability of financial
difficulties increases with increased debt.
Scott (1977), Kim (1978), and Chen (1979) stated
that if a company's debt exceeds a certain level,
its value might decrease because its bankruptcy
costs would rapidly increase. They argued that the
optimal capital structure could be determined by
comprehensively considering the effects of increasing

94

JAABE vol.13 no.1 January 2014

company values that would occur as debt increases

and the effects of reducing company values as a result
of increased bankruptcy costs. Jensen and Meckling
(1976) argued that the optimal capital structure would
be formed at the point where the sum of the agency
costs of shares and the agency costs of debts2 is the
lowest possible value. DeAngelo and Masulis (1980)
argued that the optimal capital structures of individual
companies could exist because businesses would have
the incentive to use less debt if non-debt tax shields
such as depreciation and investment tax credits were
considered simultaneously in addition to tax saving
effects from corporate and individual income taxes.
The pecking order theory assumes that when
businesses have practical investment opportunities,
they will first use internal funds and if they still need
external funds, they will first issue liabilities followed
by securities such as convertible bonds and shares to
procure necessary funds (Myers and Majluf, 1984).
The pecking order theory was first suggested
by Donaldson (1961). In his paper, he argued that
"management strongly prefers internal funds to
external funds as sources of new funds necessary
except for cases of capital requirement expansions
occurring sometimes." However, he lacked theoretical
grounds to support this argument.
Myers (1977) supplemented Donaldson's (1961)
findings and named the resultant theory the pecking
order theory. In his paper, he argued that there might be
an order in which businesses procure necessary funds.
According to the pecking order theory, since there are
two types of funding sources, internal and external, no
clearly defined optimal debt ratio exists.
A major issue on which the two theories differ
is whether the optimum debt ratio exists. Whereas
the static tradeoff theory concluded that the optimal
debt ratio exists, the pecking order theory denied this
and argued that financing methods vary according
to the situations faced by companies. From the two
previously mentioned capital structure theories,
diverse studies began emerging in certain countries or
industries. Recently, studies on individual industries
have been conducted and arguments indicating that the
capital structures of companies in individual industries
are similar to each other have been raised (Antoniou et
al., 2002, Feidakis and Rovolis, 2007).
Unfortunately, the two theories presented above have
thus far failed to clearly explain the capital structures of
companies; however, these theories have been partially
adopted depending on changes in macroeconomic
environments and the internal conditions of companies
(Titman and Wessels, 1988). Recently, arguments have
been raised that the static tradeoff and pecking order
theories should be utilized complementarily to explain
the capital structures of companies (Barclay and Smith,
2005).
2.2 Capital Structure in the Construction Sector
Capital structures in the construction sector began
to be studied directly in the middle of the 2000s; the

Jae-Kyu Choi

following studies are related to the present study.

Samiran (2010) empirically analyzed capital
structure determinants among Malaysian construction
c o m p a n i e s . I n t h i s s t u d y, a c a p i t a l s t r u c t u r e
determination model was established using a total
of 37 construction companies from 2003 to 2008.
Independent variables used in the analyses included
business scale, profitability, tangibility, non-debt
tax shields, liquidity, growth opportunities, and tax
changes; dependent variables included market and
book value leverage ratios. Since the results of the
study indicated highly negative relationships between
liquidity/growth opportunities and leverage ratio,
Malaysian construction companies argued that the
study results strongly supported the pecking order
theory.
Feidakis and Rovolis (2007) conducted an empirical
study of the capital structure determinants of 66 large
construction companies in nine European Union
countries from 1996 to 2004. Their study examined
relationships among variables such as business scale,
profitability, liquidity, tangibility, asset utilization,
growth opportunities, risk, share price performance,
GDP growth rates, and leverage (long- or short-term
debt). According to the results, they argued that the
variables that explain capital structures showed robust
effects in all nine countries. Behaviors that consistently
supported certain theories, as argued in previous
studies, were not identified.
Baharuddin et al. (2011) studied capital structure
determinants among construction companies listed
on the Bursa Malaysian stock market from 2001 to
2007. A total of 42 construction companies were
examined and the employed explanatory variables
were profitability, size, growth, and asset tangibility.
According to the results, Baharuddin argued that
profitability was negatively related to debt and
positively related to size, growth, and asset tangibility.
In conclusion, he argued that growing construction
companies relied more on debt than equity.
Most studies on the construction sector, except
for some of the previously mentioned studies,
employ elementary approaches to capital structure
determinants. One common factor between the present
study and the existing literature is that it identifies
and analyzes the capital structure determinants of
construction companies. However, as previously
mentioned, an advantage of the present study is that it
allows for relative comparisons among capital structure
determinants according to quantiles representing
excessively low or high debt since it has identified
determinants according to capital structure quantile.
3. Empirical Methodology
3.1 Data and Models
The samples used in the present study were limited
to construction companies listed on the Korean stock
market over the 11-year period from 2000 to 2010 (T =
11) because listed companies have large effects on the

JAABE vol.13 no.1 January 2014

national economy in terms of their size or economic

activities; their financial data can be more easily
collected compared to that of non-listed companies,
companies subject to external audits, and companies
not subject to external audits; and the reliability of
their financial data can be ensured. Financial data
necessary for the study were collected from TS2000, of
the Korea Listed Companies' Association, and the data
analysis, retrieval, and transfer system of the Financial
Supervisory Service.
The samples used in the study were selected from
companies that did not meet criteria for impaired
capital, suspension of current account transactions,
bankruptcy, or delisting during the data collection
period during which financial data necessary for the
capital structure calculations could be secured. The
final number of selected construction companies was
43 (N = 43) and there were a total of 473 observed
values (Observations : NT).
To explain the capital structures of construction
companies, the present study employed multiple
regression models that were established and used in
previous studies. In addition, to identify determinants
according to their capital structure quantiles, multiple
quantile regression models were introduced. The
present study employed balanced panel data combining
cross-sectional and time series data. First, a capital
structure determination model was established as per
equation 1 below.

= , i = 1, 2, , N, t = 1, 2, , T, (1)

where, Yit represents

dependent variables combining
=

, i =
1, 2, and
, N, T
t =pieces
1, 2, , T (2)
N pieces
of
cross-sectional
data
of time

series data;
X kit represents explanatory variables
combining N pieces of cross-sectional data and T
pieces of time series data; ai is a constant term; it is a
random error with a mean of 0 and variance of 2; and
K is the number of explanatory variables.
Multiple regression models using the Ordinary Least
Squares (OLS) assumption (Gujarati, 1995) generally
do so as shown above. However, to use OLS, the
behavior of average groups should be analyzed based
on conditional average values. If the distribution of
dependent variables is uneven or is spread to both
ends, the effects of certain variables on dependent
variables may be under- or over-estimated. This may
lead to different capital structure determinants for low,
average, and excessively high leverage quantiles.
Recently, studies that use the quantile regression
analysis proposed by Koenker and Bassett (1978),
Buchinsky (1998), and Koenker and Hallock (2001)
to overcome this limitation are being increasingly
conducted. Whereas classical OLS models use linear
models centered on the conditional mean of the
dependent variables, the quantile regression analysis
uses linear models centered on the conditional
quantile of the dependent variables. Therefore, the

Jae-Kyu Choi

95

quantile regression analysis can be said to be more

general. Of course, groups may be arbitrarily selected
to conduct regression analysis. Because exogenous
sample-selection criteria are arbitrarily imposed in
this case, sample selection bias will be a problem.
In contrast, sample selection bias does not occur in
the quantile regression analysis since all observed
values are assigned different weighted values and used
without the arbitrary division of samples.
Quantile regression estimators provide detailed
information on the conditional distribution of
dependent variables and indicate how robust nonsensitive responses to ideal point or error term
distributions are. Consequently, determinant models
were established
by capital structure quantiles as per

equation
below.
The
study
of nine
= 2

present
, N, tset
= 1,a2,total
, T, (1)

, i = 1, 2,

quantiles
ranging
from
0.1
to
0.9.

= , i = 1, 2, , N, t = 1, 2, , T (2)

where, Y it is represents dependent variables combining

N pieces of cross-sectional data in quantile quantile
and T pieces of time series data; X k it represents
explanatory variables combining N pieces of crosssectional data in quantile quantile and T pieces of
time series data; a 1 is a constant term in quantile
quantile; it is a random error with a mean of 0 and
variance of 2; and K is the number of explanatory
variables.
The financial data used in the analysis include
extreme values because of their nature. Therefore, to
remove the extreme values, winsorization, derived
from Charles P. Winsor's technique, was utilized
(Barnett and Lewis, 1984; Tukey, 1962). In addition,
the dependent and independent variables in each model
(pooled-OLS, Quantile Regression) were transformed
through the natural logarithm (double-log form). This
transformation method can easily interpret estimated
regression coefficients3 and also reduce the variance
and heteroskedasticity of explanatory variables
(Gujarati, 1995). To collect and process variables and
establish empirical models, programs such as EXCEL,
PASW STATISTICS 18, and STATA 11 were utilized.
The present study employed variables that have been
representatively used in the previously mentioned
theories. These variables are explained in detail in the
next chapter.
3.2 Variables
(1) Leverage Ratio (LEVR)
Although financial leverage ratios may be measured
using various proxy variables, depending on the
purposes of the study, the present study selected the
ratio of total liabilities to total assets as a proxy for
the employed capital structure. Total liabilities include
both short- and long-term liabilities. These two types
of liabilities were not separated because the present
study focuses on borrowing behavior for outside
capital rather than the maturity structures of liabilities.

96

JAABE vol.13 no.1 January 2014

(2) Company Size (SIZE)

As businesses grow, management is more diversified
and the possibility of bankruptcy gradually decreases.
In addition, approaches to capital markets become
easier (Gruber and Warner, 2012). Consequently, large
businesses will increase their use of debt because
they can do so at a relatively low cost. Titman and
Wessel (1988) argued that as business size increased,
companies would benefit from economies of scale in
liability issuing costs. Based on this argument, the
present study expected construction company size to be
positively related with leverage. The natural logarithm
value of the total assets was used as a proxy variable
for company size.
(3) Profitability (PROF)
Profitability is one of the most frequently discussed
proxy variables in the static tradeoff and pecking order
theories. According to the static tradeoff theory, as
business profits increase, tax burdens also increase.
Therefore, managers tend to procure borrowed capital
to some extent to benefit from the non-debt tax shield
of interest costs. Therefore, in the static tradeoff
theory, profitability is thought to be positively related
with leverage. In contrast, the pecking order theory
argues that when profitability increases, there will
be more internally held funds with low issuing costs
and thus the procurement of borrowed capital will be
avoided (Myers, 1984; Titman and Wessels, 1988). The
present study employed the ratio of operating profits
to sales as a proxy for profitability. The profitability
of construction companies is expected to follow the
pecking order theory and to be negatively related with
leverage.
(4) Growth Opportunities (GROWTH)
In general, businesses with high growth rates
can be considered to have more diverse investment
opportunities than other businesses. According to
Jensen and Meckling (1976), businesses with many
growth opportunities tend to maintain a low level
of debt to avoid conflicts of interest with creditors
because they have many financing options for future
investments (Jensen and Meckling, 1976; Kim and
Sorensen, 1986). Since increased debt costs due to
business growth opportunities are perceived as agency
costs that reduce business value, managers should
prefer equity to debts to avoid incurring such costs.
Therefore, the present study selected the market to
book ratio as a proxy for growth opportunities.
(5) Non-debt Tax Shield (NDTS)
DeAngelo and Masulis (1980) proposed not only the
tax-reduction effects of interest costs but also non-debt
tax shields resulting from the expenditures of non-cash
expenses such as depreciation costs and investment
tax credits. This argument states that if a tax reduction
effects investment tax credits and non-cash expenses
will offset the tax-reduction effects of debt; businesses
with large non-debt tax shields thus have relatively
fewer incentives to use debt (extension of the static
tradeoff theory). Accordingly, among construction

Jae-Kyu Choi

Table 1. Descriptive Statistics

Category

LEVR (%)
427
SIZE (Thousand Won)
429
GROWTH (%)
429
NDTS (%)
429
TANG (%)
429
PROF (%)
427
LQDT (%)
427
Note: *Variance Inflation Factor.

Minimum

Maximum

Mean

19.810
33,7940
24.499
0.002
1.217
-14.510
63.810

97.050
8,144,000
1132.761
0.552
38.980
15.270
569.440

60.829
1,274,432
259.585
0.145
14.341
5.586
173.795

Standard
Error
0.760
87,464
11.624
0.006
0.454
0.228
4.347

Standard
Deviation
15.696
1,811,597
240.758
0.129
9.413
4.704
89.817

VIF*
1.67
1.40
1.31
1.11
1.07
1.06

Table 2. Result of Pearson's Correlation Analysis

Category
LEVR
SIZE
GROWTH
NDTS
TANG
LEVR
1
.485**
-.468**
-.107*
-.103*
SIZE
.485**
1
-0.02
-.451**
-0.017
GROWTH
-.468**
-0.02
1
-0.039
-.119*
NDTS
-.107*
-.451**
-0.039
1
.246**
TANG
-.103*
-0.017
-.119*
.246**
1
PROF
-.170**
0.088
.234**
-0.05
0.004
LQDT
-.706**
-.454**
.214**
.096*
-0.089
Note: *Correlation is significant at the 0.05 level (2-tailed); **Correlation is significant at the 0.01 level (2-tailed).

companies, non-debt tax shields and leverage can be

negatively related. As in Fama and French (2002), the
present study used the ratio of depreciation costs to
total assets as a proxy for non-debt tax shields.
(6) Assets Tangibility (TANG)
Myers and Majuluf argued that if businesses
established collateral as grounds for liability issues,
they could reduce costs related to information
asymmetry. They argued that the possession of tangible
fixed assets would consequently improve solvency
security and reduce information asymmetry; thus,
those businesses would use debt rather than equity. In
the present study, the ratio of tangible fixed assets to
total assets was set as a proxy for asset tangibility.
(7) Liquidity (LQDT)
Liquidity refers to the ability to cash-in assets at firm
prices in a short time and liquidity ratios indicate the
ability of companies to repay short-term debts. Shortterm liquidity is measured by the current and quick
ratios. In the present study, current ratios were used.
Quick ratios were measured by the ratio of current
assets to current liabilities.
(8) Time Dummy (DUM2001-2010)
In the present study, to control for exogenous
effects that affect all sample companies at a certain
point, a time dummy variable was added to the model.
These exogenous effects refer to diverse factors such
as international financial crises and macroeconomic
variables. Through the time dummy variable, the
effects of the 2008 international financial crisis can
be understood as indirectly affecting and structural
changing capital structures.
4. Results of Empirical Analysis
The descriptive statistics for the dependent and
independent variables used in this study are shown
in Table 1. The descriptive statistics were calculated
using the values of the relevant variables before they

JAABE vol.13 no.1 January 2014

PROF
-.170**
0.088
.234**
-0.05
0.004
1
0.017

LQDT
-.706**
-.454**
.214**
.096*
-0.089
0.017
1

were natural logarithm-transformed. Table 2. shows

the results of the analysis of the correlations between
the dependent and independent variables. The results
indicate that variables other than liquidity had weak
correlations at the 5% significance level. Liquidity
was negatively correlated with leverage at the 1%
significance level.
The results of the verification of multicollinearity
shown in Table 1. demonstrated that the mean variance
inflation factor was 1.27 (maximum value: 1.67),
indicating that multicollinearity was not a problem.
Table 3. shows the results of the Pooled-OLS
multiple regression and quantile regression analyses.
In the case of the quantile regression analysis, as
mentioned in the theoretical discussion on the model,
was set to 0.1~0.9 and regression coefficients were
estimated for each of a total of nine quantiles.
(1) Company Size (SIZE)
The results of the POLS regression analysis
indicated that when SIZE increased by 1%, LEVR
increased by 6.9%.
The results of the quantile regression analysis
indicated that SIZE had a positive relationship to
some extent at all quantiles. Therefore, in the case
of listed Korean construction companies, SIZE can
be considered to have a positive effect on decisions
related to leverage ratios regardless of whether
borrowed capital levels are excessively low or high.
Consequently, with regard to SIZE, construction
companies are considered to follow the static tradeoff
theory because larger construction companies can more
easily obtain loans from credit/financial institutions.
This result is consistent with the empirical studies
conducted by Feidakis and Rovolis (2007), and
Baharuddin et al. (2011).
(2) Profitability (PROF)
In the Pooled-OLS regression analysis, PROF was
identified as being negatively related with leverage at

Jae-Kyu Choi

97

Table 3. Regression Results for Leverage Ratio, 2000-2010 (with time dummies)
Category
CONSTANT
SIZE
PROF
GROWTH
NDTS
TANG
LQDT
DUM2001
DUM2002
DUM2003
DUM2004
DUM2005
DUM2006
DUM2007
DUM2008
DUM2009
DUM2010

PooledOLS
5.211
(0.214)
0.069
(0.008)
-0.037
(0.011)
-0.117
(0.012)
0.026
(0.008)
-0.093
(0.009)
-0.363
(0.032)
0.043
(0.042)
-0.095
(0.038)
-0.139
(0.041)
-0.071
(0.039)
-0.022
(0.042)
-0.025
(0.042)
-0.028
(0.041)
-0.096
(0.041)
-0.111
(0.041)
-0.115
(0.044)

Quantile Regression

: 0.1
5.224
(0.600)
0.064
(0.019)
-0.033
(0.024)
-0.116
(0.029)
0.000
(0.029)
-0.120
(0.015)
-0.440
(0.058)
0.061
(0.089)
-0.098
(0.074)
-0.126
(0.075)
-0.040
(0.088)
-0.037
(0.095)
-0.062
(0.098)
-0.044
(0.104)
-0.036
(0.092)
-0.075
(0.083)
-0.102
(0.085)

: 0.2
5.404
(0.416)
0.061
(0.014)
-0.036
(0.017)
-0.079
(0.022)
0.011
(0.021)
-0.113
(0.013)
-0.457
(0.051)
-0.012
(0.065)
-0.113
(0.071)
-0.131
(0.062)
-0.091
(0.061)
-0.107
(0.077)
-0.088
(0.084)
-0.086
(0.081)
-0.104
(0.057)
-0.096
(0.061)
-0.132
(0.068)

: 0.3
5.583
(0.385)
0.056
(0.014)
-0.026
(0.014)
-0.083
(0.019)
0.022
(0.015)
-0.095
(0.012)
-0.446
(0.061)
0.062
(0.054)
-0.024
(0.057)
-0.115
(0.050)
-0.066
(0.051)
-0.048
(0.070)
-0.027
(0.066)
-0.008
(0.067)
-0.057
(0.049)
-0.067
(0.053)
-0.081
(0.059)

: 0.4
5.377
(0.323)
0.054
(0.011)
-0.037
(0.013)
-0.096
(0.017)
0.013
(0.011)
-0.092
(0.011)
-0.385
(0.054)
0.061
(0.049)
-0.040
(0.046)
-0.119
(0.050)
-0.056
(0.051)
0.018
(0.063)
0.001
(0.060)
0.010
(0.057)
-0.045
(0.050)
-0.076
(0.053)
-0.080
(0.057)

: 0.5
5.320
(0.256)
0.057
(0.009)
-0.034
(0.010)
-0.107
(0.015)
0.013
(0.007)
-0.087
(0.011)
-0.369
(0.040)
0.053
(0.049)
-0.049
(0.046)
-0.106
(0.057)
-0.047
(0.049)
0.020
(0.056)
0.009
(0.059)
0.014
(0.054)
-0.058
(0.051)
-0.079
(0.054)
-0.074
(0.053)

: 0.6
5.341
(0.259)
0.059
(0.008)
-0.035
(0.009)
-0.113
(0.013)
0.015
(0.007)
-0.078
(0.013)
-0.354
(0.044)
0.007
(0.046)
-0.109
(0.045)
-0.124
(0.056)
-0.096
(0.046)
-0.002
(0.048)
0.002
(0.055)
0.006
(0.050)
-0.103
(0.047)
-0.107
(0.048)
-0.130
(0.047)

: 0.7
5.186
(0.269)
0.063
(0.008)
-0.031
(0.010)
-0.115
(0.013)
0.020
(0.007)
-0.085
(0.014)
-0.331
(0.048)
0.017
(0.051)
-0.094
(0.047)
-0.090
(0.049)
-0.076
(0.046)
0.004
(0.048)
0.011
(0.047)
-0.010
(0.044)
-0.106
(0.048)
-0.099
(0.042)
-0.114
(0.043)

: 0.8
5.310
(0.281)
0.059
(0.009)
-0.040
(0.014)
-0.117
(0.013)
0.021
(0.008)
-0.081
(0.015)
-0.322
(0.048)
0.049
(0.067)
-0.092
(0.053)
-0.099
(0.050)
-0.080
(0.055)
0.012
(0.055)
0.008
(0.049)
-0.037
(0.048)
-0.108
(0.057)
-0.118
(0.050)
-0.153
(0.054)

: 0.9
5.057
(0.306)
0.069
(0.011)
-0.053
(0.018)
-0.134
(0.015)
0.030
(0.011)
-0.068
(0.016)
-0.261
(0.047)
0.067
(0.088)
-0.087
(0.081)
-0.132
(0.075)
-0.031
(0.095)
0.012
(0.077)
-0.016
(0.075)
-0.056
(0.087)
-0.102
(0.089)
-0.152
(0.084)
-0.177
(0.094)

F-test time
3.74***
1.12
0.87
1.56
2.29**
2.48***
3.75***
2.85***
3.21***
3.27***
dummies
F-test all
42.63***
32.46***
24.85***
17.92***
17.90***
23.42***
23.16***
24.54***
24.93***
16.07***
variables
R-Squares
0.734
Pseudo
0.578
0.532
0.507
0.483
0.462
0.444
0.432
0.422
0.401
R-Squares
Notes: The bold regression coefficients are significant at the 5% level. The values in parentheses in the Pooled-OLS row are Robust Standard Errors. The values
in parentheses in the Quantile Regression rows are Bootstrap standard errors extracted using 1000 bootstrap replications. **Indicates significance at the 5% level;
***indicates significance at the 1% level. SIZE: total assets; PROF: the ratio of operating profits to sales; GROWTH: market to book ratio; NDTS: the ratio of
depreciation costs to total assets; TANG: the ratio of tangible fixed assets to total assets; LQDT: the ratio of current assets to current liabilities. Dependent and
independent variables were natural logarithm-transformed (except time dummy variables).

the 5% significance level or lower. The results can be

interpreted as indicating that when PROF increases
by 1%, the leverage ratios decrease by 3.7%. In the
quantile regression analysis results, PROF was identified
as negatively related with leverage at all quantiles
except 0.1 and 0.3 (at the 5% significance level).
Profitability is perceived as the most important variable
influencing choices between the two capital structure
theories. Consequently, construction companies are
considered to have shown negative attitudes toward the
procurement of additional external funds because they
employ project profits as investment capital for future
projects. Therefore, the capital structures of construction
companies can be considered to follow the pecking
order theory. However, since not all leverage ratio
quantiles generated significant results, as in the case of
the quantile regression analysis, the capital structures
of construction companies are considered to partially
accommodate the pecking order theory. Due to the static
characteristics of the study methodology, there dynamic
analyses present some difficulties, as mentioned above.
(3) Growth Opportunity (GROWTH)
The results of the POLS regression analysis indicated
that GROWTH was negatively related with leverage at

98

JAABE vol.13 no.1 January 2014

the 5% significance level or lower. This result can be

interpreted as indicating that when GROWTH increases
by 1%, leverage ratios decrease by 11.7%. In the quantile
regression analysis, GROWTH's coefficient values
also show negative relationships at a certain level. This
means that GROWTH variables show robust effects
at all quantiles. Consequently, construction companies
can be considered to support the static tradeoff theory
because businesses with high growth rates should prefer
to invest only in investment proposals that can maximize
shareholder value rather than investing in optimal
investment proposals by issuing liabilities because they
have many investment opportunities. Since high agency
costs may be incurred due to agency conflicts between
shareholders and creditors as a result of such excessively
low investments, companies with high growth rates are
able to maintain low leverage ratios. The results of the
present study are consistent with those of previous studies
(Jensen and Meckling, 1976; Kim and Sorensen, 1986).
(4) Non-debt Tax Shield (NDTS)
The results of the Pooled-OLS regression analysis
indicated that when NDTS increased by 1%, leverage
ratios increased by 2.6% (significance level of 5% or
lower). However, the results of the quantile regression

Jae-Kyu Choi

analysis indicated that NDTS had no significant value

at the 0.5 or lower quantiles. NDTS was identified as
being positively related with leverage ratios at the 0.6
or higher quantiles. This result is in contrast to the
results of a previous study indicating that, from the
perspective of the static tradeoff theory, businesses
with many non-debt tax shield measures such as
investment tax credits would procure smaller debts.
The previous study on non-debt tax shields is evaluated
as not logically interpretable. Therefore, it can be
concluded that non-debt tax shields are not appropriate
for the determination of capital structures among
construction companies.
(5) Asset Tangibility (TANG)
According to the results of the Pooled-OLS
regression analysis, when TANG increased by 1%,
leverage ratios decreased by 9.3% (significance level
of 5% or lower). As with the results of the PooledOLS regression analysis, the results of the quantile
regression analysis indicated that TANG was negatively
related with leverage ratios at all quantiles (significance
level of 5% or lower). Given these results, the asset
tangibility of the construction industry operates through
a different mechanism than that found by previous
empirical analyses. Whereas the manufacturing
industry continuously generates sales through factories,
machines, equipment, and land, construction companies
do not generate revenues through tangible fixed assets.
This is considered to be why its coefficient showed a
different sign. Of particular interest in the results for
TANG is that the effects of coefficients decreased at
higher leverage ratio quantiles. Additional studies are
required to further investigate this matter.
(6) Liquidity (LQDT)
According to the results of the Pooled-OLS
regression analysis, when LQDT increased by 1%,
leverage ratios decreased by 36.3%. The results of the
quantile regression analysis showed that the effects
of coefficients decreased at higher leverage ratio
quantiles. This result proves that if the OLS estimation
method has a centralizing tendency, regression
coefficients may be under- or over-estimated. In
conclusion, this means that construction companies
with high liquidity should have low leverage ratios.
(7) Time Dummy (DUM2001~2010)
The results of the Pooled-OLS regression analysis
indicated that the time dummy variables for 2002, 2003,
2008, 2009, and 2010 were significant (significance
level of 5% or lower). This indicates that the leverage
ratios of construction companies changed due to the
2008 international financial crisis and the 2009 European
sovereign debt crisis mentioned in the introduction. The
results of the quantile regression analysis indicated that
the time dummy variables for 2008, 2009, and 2010
were significant within the excessively high leverage
ratio quantiles. Given this finding, exogenous factors
such as the macroeconomic crisis can be considered to
have changed the capital structures of companies that
fall within excessively high leverage ratio quantiles.

JAABE vol.13 no.1 January 2014

5. Conclusion
This study empirically analyzed the capital structure
determinants of listed Korean construction companies
from 2000 to 2010. In particular, the empirical
analyses focused on changes in the coefficients of the
determinants according to the leverage ratio quantiles
of the construction companies. The results of the
empirical analyses can be summarized as follows.
Construction company size was positively related
with leverage. Construction company size had a certain
positive effect on all leverage quantiles and there were
no extreme differences between the excessively low
and high leverage ratio quantiles. This result supports
the static tradeoff theory with regard to business size.
Construction company profitability was negatively
related with leverage. The profitability of construction
companies had a stronger negative effect on the
high leverage quantiles. In contrast, the coefficient
values became less significant in the lower quantiles.
Therefore, the tendency of construction companies to
partially accommodate the pecking order theory could
be identified.
Growth was identified as being negatively related
with leverage. The influence of growth gradually
increased in the higher leverage quantiles.
Although non-debt tax shields were identified as
being positively related with leverage, in the results of
the quantile regression analysis, the relationships were
significant for the 0.6 or higher quantiles. Although
the effects of non-debt tax shields were larger for the
excessively high leverage quantiles, the sign of the
coefficient was different from that found in previous
studies, making analysis impossible. In conclusion, the
effects of non-debt tax shields on the capital-structurerelated decisions of construction companies are
considered to be quite limited.
Asset tangibility was found to be negatively
related with leverage. This result differed from those
of previous studies because the asset portfolios of
construction companies differ from those of companies
in other industrial fields. In addition, asset tangibility
effects gradually decreased as leverage quantiles
increased. This is considered different from the
results obtained when the acts of average groups were
explained based on the conditional mean value of OLS.
That is, the OLS estimation coefficient at excessively
low leverage under-estimated actual quantities and
that at excessively high leverage over-estimated actual
quantities. The foregoing asset tangibility behavior
should be further empirically analyzed.
Liquidity was found to be strongly negatively
related with leverage, because the financing behavior
of construction companies is focused on the
management of operating capital. Moreover, as with
asset tangibility, large differences were identified in
both extreme quantiles. Liquidity was more sensitive
in the excessively low leverage quantiles than in the
excessively high leverage quantiles. Additional studies
are required to further analyze this issue.

Jae-Kyu Choi

99

According to the results of both empirical analysis

models, liquidity had the strongest negative effect
on the capital structures of listed construction
companies. However, the effect of liquidity was
lower in excessively high leverage quantiles than the
excessively low leverage quantiles. This is because
most construction companies utilized the leverage
effect to maximize profits regardless of their financial
(debt-repayment) capabilities. The risky behavior of
the analyzed Korean construction companies could
lead to repeated financial liquidity crises whenever
macroeconomic recessions occur.
To resolve this problem, construction companies
need to set a target leverage ratio based on their debtrepayment capabilities and future growth potential
and profitability. This target then needs to be
continuously managed and modified. Moreover, the
reason construction companies in Korea repeatedly
face liquidity crises is their excessive concentration
on private housing construction. Despite the riskiness
of this business sector, they employ no risk-hedging
strategies. Therefore, if construction companies utilize
excessively high leverage, they will have to reduce
their financial risks through diversification (such as
taking on public construction projects and securing
cash-flows).
As shown in the conclusion, the capital structure
determinants of construction companies exhibit
different patterns from those described in traditional
theories and previous studies, perhaps because the
characteristics of the construction industry. Moreover,
the patterns vary according to the market environments
and cultures of different countries. Currently, studies
in business management and finance utilize various
quantitative analysis methods to theorize about the
decision-making behaviors of companies and aim to
help actual businesses make decisions. The construction
industry should also accept/apply related methodologies
and theories to derive new research fields.
Acknowledgements
This work was supported by the National Research
Foundation of Korea(NRF) grant funded by the Korea
government(MEST)(No. ERC-2005-0049719).
Notes
1

Capital structure can be defined differently depending on the

purpose of the study. In the present study, capital structure was
defined as a combination of equity and borrowed capital, and
leverage ratios (total debt and bonds payable to total assets) were
utilized.
2
As for agency costs, gaps exist between the interests of creditors or
shareholders and those of managers in limited company systems,
where ownership and management are separated from each other.
Depending on their interests, agency problems can occur. The
costs from conflicts of interests between external shareholders
and managers are called agency costs of equity. The agency costs
between shareholders and creditors are called agency costs of debt.
3
For example, the simple double-log form is as follows: ln Y
=a1+a2 ln X + , a2 means that when X increased by one percent, Y
changed by a2%. It is called the elasticity coefficient in economics.
where, ln Y is logged Y; a1 is constant term; a2 is coefficient; ln X
is logged X; is error term.

100 JAABE vol.13 no.1 January 2014

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Jae-Kyu Choi