Capital Structure and Firm Performance - An Assessment of Determining Factors of Capital Structure and its Effect on Firm Performance in the Norwegian Market

Arya Aimagh & Stig Eddie Larsson

Student thesis: Master thesis


This paper investigates the factors that determines the capital structure and its effect on firm performance. A sample of 78 Norwegian firms listed on Oslo Stock Exchange All Share Index (OSEAX) has been applied to analyze the relationship between leverage and company performance. The chosen sample period is 2006–2016 and annual figures were collected from DataStream in order to perform the empirical study. In this paper, a panel data approach has been applied and the analysis has been divided into two main parts. The first part considers the variables that determines the capital structure where the chosen variables consist of size, tangibility, profitability, age, growth and non-debt tax shield. As proxies of capital structure, we included the ratios of short-term debt, long-term debt and total debt over total assets. During the second part of our analysis, we investigate the effect capital structure has on firm performance. The capital structure ratios are now used as explanatory variables while the determined factors are used as control variables. As performance ratios, we used return on asset, return on equity and Tobin’s Q. All chosen variables have been proved to be significant in previous empirical studies. The findings from the first section suggest that size, age, tangibility, profitability and non-debt tax shield all have a significant effect on firm leverage. Size is found to be negatively related to all debt ratios whereas mixed signs are found to the other factors depending on which leverage ratio is used. Our results are also partly in line with developed theories, such as the pecking order theory and the trade-off theory. The discovery of capital structure and its effect on firm performance suggest that Norwegian listed companies with lower short-term debt and total debt tend to generate a higher return on their assets. Furthermore, short-term and total debt are found to have a positive relationship to Tobin’s Q, which suggests that firms with high debt ratios tend to achieve a higher market-tobook value of their assets. Finally, our results indicate capital structure has no effect on performance measured by ROE for the listed Norwegian companies.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2018
Number of pages140