The Effect of Business Risk on Financial Leverage - A Study of Capital Structures of Swedish Listed Firms

Sammanfattning: This thesis aims to investigate the impact of business risk on firm capital structure. Trade-off theory suggest that, all else equal, firms with higher business risk should have lower financial leverage. This study investigates 309 listed Swedish firms over a ten-year period, using both cross-sectional and panel data approaches where business risk is measured as volatility in operating profitability. Our empirical findings suggest a statistically significant negative relationship between business risk and financial leverage. The results are, however, sensitive to the leverage measure used and a statistically significant relationship is found only for leverage based on financial debt but not for total liabilities. This indicates that financial and operating liabilities have different drivers. This study contributes to existing research by confirming the robustness of four other determinants of capital structure - firm size, asset tangibility, firm profitability and investment opportunities. Additionally, this study shows that the determinants of capital structure have different explanatory power for different types of firms, which calls for more qualitative research within the field of capital structure.