Determinants of Capital Structure: How Does the Capital Structure of Private Companies Differ From Listed Companies in Denmark?

Abstract

This paper examines the differences in capital structure between private and listed companies in Denmark using data from 2017 to 2021, including 982 private and 78 listed firms. The study aims at analyzing how different determinants affect capital structure. These include asset structure, earnings volatility, growth, non-debt tax shield, profitability, and size. The primary theoretical frameworks applied are the trade-off theory and the pecking order theory. The findings primarily support the pecking order theory, as shown by the relationships between asset structure, earnings volatility, growth, profitability, and leverage. The differences in capital structure between private and listed companies are analyzed using a T-test and a Pooled OLS model, which incorporates a dummy variable for access to stock market. The results show that private companies have higher leverage and a greater proportion of short-term liabilities than listed companies, as indicated by their total and short-term debt to total assets ratios. The results also indicate that listed companies have a higher proportion of long-term liabilities, as reflected in the long-term debt to total assets ratio. A Pooled OLS model was used to analyze the determinants of capital structure and their impact on leverage. The findings reveal that less profitable private companies and those with fewer tangible assets tend to rely more on short-term debt. Furthermore, companies with greater tangible assets or larger sizes typically secure better access to long-term debt, which to some extent may explain why listed companies have a higher degree of long-term debt. Overall, the determinants cannot explain the fundamental differences in capital structure. The dummy variable for access to stock market indicates that being listed significantly influences these differences. Access to stock market reduces asymmetric information, improving access to external financing, including long-term debt, which likely explains the higher proportion of long-term debt for listed companies. Moreover, the lower leverage of listed companies could be due to their reduced reliance on short-term debt, resulting from alternative sources of financing such as longterm debt and equity.