The effect of demand uncertainty on capital structure for South Korean SMEs: Stochastic Frontier Analysis based framework

This study examines the impact of demand uncertainty on the capital structure of South Korean small and medium-sized enterprises (SMEs) from 2000 to 2019. Unlike the previous studies, utilizing a two-stage approach, the study first employs Stochastic Frontier Analysis (SFA) to measure demand uncertainty, a novel methodological contribution. Subsequently, the Generalized Method of Moments (GMM) is used to analyze its effect on capital structure, accounting for firm dynamics within a dynamic framework. Based on a sample of 281 SMEs, the findings reveal that demand uncertainty acts as a significant barrier to financial leverage. These results, which remain robust across various checks, suggest that high uncertainty compels firms to rely on internal financing in the context of South Korean SMEs.