The Swedish Capital Structure Puzzle: An Econometric Analysis of the Pecking Order and Static Trade Off’s Predictions on the Choice of Leverage for Private and High-growth Firms in Sweden

Philip Diamant & Alex Winström

Student thesis: Master thesis


This paper investigates firm-specific capital structure determinants of Swedish private firms using a panel data set of 9958 firms followed between 2010-2018. We review relevant theoretical frameworks and apply the trade-off and pecking order theory to formulate testable hypotheses. Leverage ratios are then regressed on firm-specific variables using fixed effects regression analysis, which accounts for unobserved heterogeneity. In addition, interaction terms are used to capture the additional impact on leverage, given a change in capital structure determinants, if a firm is classified as high-growth. This is done using a subsample of 1,359 high-growth firms.
The regression results for the total sample assigns explanatory power to both theories. However, the strong inverse relationship across all debt maturities between profitability and leverage, indicates that the pecking order theory has the upper-hand. Furthermore, the total effect for the additional impact of being a high-growth firm is shown to negatively impact leverage, given an increase in the explanatory variables. Hence, our results indicate that being a high-growth firm increases information asymmetry and the cost of financial distress.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages93
SupervisorsThomas Geelen