The Trade-off Theory and Firm Leverage - Can the Trade-off theory explain the leverage development among Swedish listed firms?

Sammanfattning: This thesis aims to investigate if a dynamic application of the classic trade-off theory contributes in explaining the leverage development among companies listed on the Swedish Stock Exchange. After verifying inter-industry leverage differences, an industry comparing approach is applied to contrast the explanatory power of the trade-off theory between industries. A partial adjustment model is used to measure firms' adjustment towards optimal leverage targets. Target leverage is estimated in two ways. First, firm specific characteristics are used to explain firms' optimal leverage. Second, the industry standard is used as proxy for optimal capital structure. The conclusions drawn are that leverage significantly differs across industries and that large- and mid-cap firms' leverage development can be explained by the trade-off theory. However, the trade-off framework does not provide a comprehensive explanation of firms' target leverage on industry level.