The Impact of Financial Market Uncertainties on Corporate Borrowing Costs: Evidence from the Korean Manufacturing Sector

In recent years, global financial markets have experienced unprecedented volatility due to a confluence of factors, including the COVID-19 crisis, the Russian-Ukraine war, the US-China rivalry and strategic economic decoupling, conflict in the Middle East, and severe supply chain disruptions. Central banks responded to the inflationary pressures caused by these and other factors with aggressive monetary policy, which has in effect meant a sharp increase in interest rates across the globe. Lingering uncertainties in financial markets have also contributed to high lending rates, as greater risks drive financial institutions and investors in corporate financing markets to demand higher returns on their investments. And rates seem unlikely to fall in the long term, as ongoing changes to the structure of the global economy — the evolving dynamics of globalization, falling birth rates, and an aging population — exert upward pressure on inflation, anchoring interest rates at current levels. As a consequence, many firms have struggled to access funding through direct finance channels (equity sales and bond issuance) and instead rely mostly on indirect finance (loans). This owes partially to the fact that, as rates grew in 2022 and stayed high in 2023, corporate debt burdens ballooned, raising the risk of widespread bankruptcies. In this study, I examine how greater uncertainties in financial markets affect corporate borrowing costs. In Korea, the two key capital markets with an influence on corporate finance are the loan market, where banks play a central role, and the corporate bond market, where firms issue bonds to raise funds.