Research on the Leverage Effect in Response to Global Crisis: Focusing on Interest Rate Changes amid the Global financial crisis and the Non-financial crisis COVID-19 situation

This study examines the relationship between corporate leverage and profitability in the context of the global financial crisis that began in 2008 and the non-financial crisis caused by COVID-19 in 2020 for publicly traded companies in South Korea. Out of the 1,581 firms with complete data from 2005 to 2022, we selected 1,059 manufacturers, including 604 large and 448 small firms, excluding industries where the number of firms is relatively small. The empirical results show that the relationship between profitability and leverage changed from a significant negative relationship before the financial crisis to a significant positive relationship after, and from a significant positive relationship to a significant negative relationship in non-crisis conditions. Given the significant negative relationship in prior studies and across the study period, it seems the two crises have an inherent distinction between financial system crises and market system crises, and that the relationship between leverage and profitability is temporarily distorted when central banks make unusually rapid interest rate changes. The significance of this study is that it goes beyond existing literature on the leverage-profitability relationship, which differs by country and context, and analyzes the relationship before and after the crisis, suggesting that a sharp interest rate change directly affects leverage and profitability. It also provides a basis for predicting firm performance in response to central bank policies in a future global crisis.