Capital Structure: An Empirical Review of the Capital Structure for Listed Airlines

Abstract

The purpose of this paper is to investigate the development in capital structure for publicly listed airlines and determine which of the known capital structure theories are best represented in practice. The investigation is done over two time periods resulting in a total of 20 years and thus includes two major international crisis periods comprised of the financial crisis and the covid-19 pandemic. The methods used involve the use of descriptive statistics and multiple regression analysis with commonly used determinants from previous capital structure studies. Furthermore, the analysis is divided into different segments based on market capitalisation to assess whether larger and more established airlines have different characterics than smaller airlines when determining capital structure. The findings of the paper is largely consistent with the predictions of the Trade-off theory whereas the Pecking Order is mainly prominent based on profitability alone. Furthermore, it is apparent that the global financial crisis and covid-19 pandemic have had a serious impact on the airline companies as these became more indebted during these times. Finally, the multiple regression analysis indicates that all five included determinants encompassing profitability, tangibility, size, volatility and growth opportunities are stastistically signifinant and thus influence the capital structure development in airline companies. The findings generally apply for all the included segments of airlines with the single exception of mid-large cap airline companies. These larger airlines and their choice of capital structure could not be statistically proven to be influenced by the profitability determinant in all the regression models which could indicate that other external factors may be applicable.