Capital Structure Dynamics in Times of Crisis: A Comparative Analysis of the Financial Crisis and the COVID-19 Pandemic

Abstract

For decades, capital structure has been extensively examined and explained in the academic field of Cor-porate Finance. This thesis contributes to the existing knowledge, by investigating the capital structure of the periods preceding the financial crisis and the covid-19 crisis. The study examines conventional factors that account for features in capital structure. Additionally, it investigates interest rate levels, corporate growth, and the impact of the financial crisis on the memory of firms.

Utilizing eight different capital structure ratios, divided into groups of book value, market value, and prof-itability, the study conducts a comprehensive descriptive analysis of the dataset, to assess temporal de-velopments in capital structure. The descriptive analysis encompasses the entire dataset, examines changes in capital structure over time, as well as the periods preceding the two defined crisis. To provide further statistical evidence for determining factors influencing capital structure, 56 regression models were employed for the analysis. These models are conducted on the complete dataset, the preceding crisis periods, observations consisting of firms listed before 2008, and a winsorized dataset was used to perform robustness checking.

The results demonstrate a noticeable shift towards lower levels of leverage in the sample, leading to sig-nificant differences in the capital structure of the periods preceding the financial crisis and the COVID-19 crisis. The findings also reveal distinct variations in leverage levels, highlighting the impact of financial upheavals on firms’ capital structure decisions. Additionally, the study identifies several significant explan-atory variables that influence capital structure over time. Classic factors such as tangibility, materiality, volatility, and particularly size, emerge as key drivers in elucidating the dynamics of capital structure, lead-ing up to the financial crisis. However, these factors play a lesser role in explaining the capital structure dynamics leading up to the COVID-19 crisis. Furthermore, while interest rate levels and the memory effect of the financial crisis are found to be significant explanatory variables leading up to the COVID-19 crisis, their significance is challenged by the effect of omitted variables.

Through its examination of capital structure dynamics during different economic contexts, this research provides valuable insights into the effects of crisis and contributes to the overall understanding of firms’ capital structure determinants.