Determinants of capital structure: An empirical study on large cap companies listed on Helsinki Stock Exchange between 2015-2019

Abstract

One of the essential questions for companies’ managers is how they should opt for the set of securities to issue for the purpose of raising funds. This decision determines the firm’s capital structure, which is the relative proportions of debt, equity and other securities that a firm has outstanding. Considering the fact that choice of debt and equity depends on characteristics for firms as well as firm’s activities are governed differently in different countries due to distinctive environment and regulation, findings on the capital structure studied in the past were varied and contradictory. Capital structure decision is primarily analyzed based on three main theories-pecking order theory (Myers and Majluf 1984), trade-off theory (Myers 1984) and agency cost (Jensen and Meckling 1976). The purpose of this study is to examine the factors and their different impacts on the choice of capital structure for publicly listed large firms in Finland. This thesis covered the leverage determinants of 30 non-financial firms listed in Large Cap index in Finland over the period of five years 2015-2019. In order to pursue the answer for the research questions, both quantitative and explanatory research approaches were employed. In this paper, three debt ratios were selected: total debt ratio, long-term debt ratio and short-term debt ratio. While the explanatory variables as firm-level determinants of capital structure were chosen as profitability, tangibility, firm size, non-debt tax shields, growth opportunity, and liquidity. Fixed effect panel data model was performed in order to identify the determinants of listed large cap companies in Finland. The results showed that there is significant positive impact of tangibility, firm size on leverage which supports Trade-off theory and Agency theory and the significant correlation between liquidity and leverage confirms Pecking Order theory. However, profitability and growth opportunity have no significant influence on capital structure choice. Among all the significant variables, non-debt tax shield has the strongest impact on capital structure choice of Finnish large cap firms.