Firms' Leverage and Export Market Participation: Evidence from South Korea

To understand why some firms export while others do not, it is necessary to understand major determinants which lead some firms to engage in exporting. A large base of empirical literature provides evidence that firms which trade are systematically different from those which do not trade in size, productivity, and the involvement of multinational corporations. In this paper, we introduce a financial dimension as an additional source of firm heterogeneity to understand export market participation, and examine how the impact of leverage on firms' exporting decisions varies depending on financial constraints, using a panel of 3,353 Korean manufacturing firms over the period of 1994-2011. First, we find that leverage for financially-constrained firms is negatively associated with the probability of exporting while leverage for financially-unconstrained is not. Also, we find that in the sample of financially-constrained firms, future exporters have higher leverage before they begin to export, while in the sample of financially-unconstrained firms, firms with ex-ante lower leverage self-select to export. Finally, it is found that export market participation decreases leverage for both financially-constrained and financially-unconstrained firms, but the magnitudes of decreases in leverage are larger for financially-constrained firms.