The study of association between the market risk and the capital structure in the Finnish corporate sector

Abstract

The main purpose of this research is to examine the dynamics of risk and financial leverage in the Finnish stock market. The researcher was interested in this topic because it was interesting, contemporary and often underestimated by managers. Market risk and capital structure are deeply connected. The author was fascinated by the theme because the market risk can impact capital structure and capital structure in turn makes an impact on the market risk. If the capital structure is too much biased in favor of debt, the debt to equity ratio is very high, there can be more market risk. The company becomes riskier because the managers have to return more cash to debtholders. The key theoretical underpinning to use is the Capital Asset Pricing Model. The author was interested to test the theory on modern data represented by 50 Finnish companies’ stocks listed on the stock exchange. The research horizon was from 2012 to 2018. Secondary numerical data was examined. The research data was collected from annual reports of the companies and NASDAQ. The researcher wanted to explore, what factors influence market risk, capital structure, and their interconnection. To formulate research questions the author has thoroughly read the classical and modern theory of finance and also the latest research in this area. The author analyzed data with the help of statistics and statistical tool SPSS. Further she analyzed results and made conclusions based on knowledge received during research and also her study at JAMK. Based on the literature review the researcher chose independent and dependent variables. With the help of these variables, the researcher created the models to test hypotheses. The author analyzed descriptive statistics output, applied correlational and regression analysis to find answers to the research questions, and tested hypotheses. The researcher found out, that there was no interconnection between leverage and systematic risk, leverage, and earnings volatility, that firm-level performance variable did not affect systematic risk, independence of the board did not affect the capital structure and systematic risk.