This thesis has two tasks: One of them is to analyze the relationship between the capital structure and tax system in Korea by using the 'seemingly unrelated' models of the optimal capital structure and neutral tax system. The capital structure model was extended by incorporating the market interest rate and regulated interest rate which are uniquely observed in Korea.
The other, more important, is to test the models with an explicit consideration of the Korean tax environment. The capital structure theory relate the capital structure with the corporate and individual tax rates, market and regulated interest rates, and inflation rate. The result of the empirical test confirms the magnitudes and directions predicted by the models. Also, the result indicates the downward rigidity of the average debt-equity ratio of the sampled firms during 1961-1982. An empirical result of the neutral tax model implies that the trend of the debt-equity ratio may be explained by the availability hypothesis. In order to achieve the neutral tax system in Korea, it is desirable to introduce a fixed tax rate on the income at the corporate level and abolish the individual taxes on dividend income.
