Empirical Capital Structure: Empirical Analysis of Capital Structure for Listed Danish Companies

Abstract

This thesis investigates empirical capital structure for listed Danish firms, with the intention to test to what degree capital structure theories can explain the empirical tendencies. This is done by analyzing a set number of hypothesis that are interpreted from the Trade-off theory and the Pecking Order theory. The thesis uses regression analysis to study empirical data from 1998 to 2021 on firm specific data from listed Danish companies. The results indicate that even though a lot of noise is found that the Trade-off theory explains more of the variance in capital structure than the Pecking Order theory in the period 1998-2021. When dividing the data into a section before and after the financial crisis the conclusion is even more diverse. Before the crisis determinants point in the direction of the Trade-off theory’s hypothesis. In contradiction, after the crisis the Pecking Order theory are able to explain more of the variation in capital structure with special focus on hypothesis for profitability, size, and tangibility. In addition, the regression indicates that the factors profitability, size, tangibility, growth opportunities and interest rate level influence the capital structure decisions of firms. Moreover, the thesis discuses an important fact about the interest rate level and the theoretical foundation of the Trade-off theory’s tax shield. It concludes that the low interest levels, even though in theory don’t have an influence, will in practice delay the capitalization of the value of the tax shield to the firm. The results indicate an important fact that the two theories do not necessarily have contradictory hypotheses of capital structure determinants and are therefore not mutually exclusive in explaining capital structure decisions. Furthermore, it concludes that both theories can explain some empirical tendencies but lack the full picture of capital structure determinants.