Capital Structure and Performance in Private Firms : A Panel Study using Swedish Data

Sammanfattning: Capital structure has been a widely discussed subject among researchers, but no clear-cut answer regarding the optimal level has yet been provided. A great amount of previous researchers has studied how main theories, such as Modigliani and Miller´s “irrelevance of capital structure”, perform in real life and an extensive amount of studies have been made on the conceptual link between capital structure and performance. Although the majority of previous studies have been conducted on international public firms, less attention has been given to private firms in Sweden. Therefore, the purpose of this study is to investigate the association between capital structure in Swedish unlisted firms and performance. Furthermore, this study aims to investigate whether the location of the firm influence this relationship. In line with previous research, this study use a robust regression model and a random effect model to analyze a sample of 7444 unlisted Swedish firms, operating in 28 industries, in 21 different locations, during the time period 2009-2014. Return on assets is used as a proxy for performance and capital structure is defined as total, short term and long term debt scaled to total assets respectively. Our results show that there is a negative association between capital structure and performance and thereby reveals results in line with the pecking order theory. This implies that high levels of debt seems to increase the cost of outside financing in the presence of asymmetric information, which will make managers of private firms in Sweden more likely to use inside finance to acquire capital for their operations. Furthermore, a concave association between capital structure and performance is tested for total debt and short term debt in line with the agency cost theory. This result is also significant and provides reasons to assume that there might be an optimal capital structure in private firms in Sweden. To the authors’ best knowledge this study is one of the first to examine a concave relationship between capital structure and performance on private listed firms in Sweden as well as finding a significant impact of location on this association. In our additional analysis we also observe that the relationship between capital structure and performance is significantly different in Stockholm, Västra Götaland and Skåne in comparison to firms located in other places.