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Tax Benefits of Debt and Debt Financing in Korea


  • Acknowledgments: We are grateful to two anonymous reviewers for their constructive suggestions. This study is supported by a Korea University Business School Research Grant.

Corresponding author: Sung-Soo Yoon, LG-POSCO 309, Korea University Business School, Anam-Dong, Sungbuk-Gu, Seoul 136-701, Korea. Tel: +82-2-3290-2601, Fax: +82-2-922-7220, email:


In this study, we attempt to determine whether or not Korean firms have failed to fully utilize the tax benefits of debt, particularly in the aftermath of the 1997 Asian financial crisis. Results suggest that underleveraged firms lost significant tax savings that would have been available had they increased debt levels to their kink. The incremental tax benefit in 2008 is estimated to be as large as 5.2% (2.1%) of firm value prior to (after) the personal tax penalty. These firms’ low leverage, however, seems reasonable when we consider the financial distress costs. Increases in expected default costs offset the majority of potential tax savings after the financial crisis.