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Capital structure and firm performance: A study on Sweden’s OMX30 index

Nordenlöw, Gustaf LU and Thufvesson, Balder LU (2021) NEKN02 20211
Department of Economics
Abstract
The purpose of this thesis is to examine the relationship between varying leverage ratios and performance for large Swedish firms. With a recent trend of decreasing borrowing rates, it is more common for Swedish firms to have a larger portion of debt on their balance sheets. This trend makes it important to understand the effects changing leverage has on firm performance. The relationship between leverage and performance is examined by observing data from the constituents of the OMX30 index between 2000 and 2020. Firm performance is measured as return on assets, return on equity and Tobin’s Q. Each performance measurement is regressed on capital structure proxies and a set of control variables. The main findings seem to confirm that there... (More)
The purpose of this thesis is to examine the relationship between varying leverage ratios and performance for large Swedish firms. With a recent trend of decreasing borrowing rates, it is more common for Swedish firms to have a larger portion of debt on their balance sheets. This trend makes it important to understand the effects changing leverage has on firm performance. The relationship between leverage and performance is examined by observing data from the constituents of the OMX30 index between 2000 and 2020. Firm performance is measured as return on assets, return on equity and Tobin’s Q. Each performance measurement is regressed on capital structure proxies and a set of control variables. The main findings seem to confirm that there is a negative link between leverage and firm performance when performance is measured on a return basis, although only statistically significant on the level of 10%. In turn, this seems to suggest that firms with more debt underperform relative to its peers and that firms sacrifice performance when issuing debt. This supports the agency cost of debt theory inasmuch as the negative link indicates firms’ returns are lower after increasing their leverage. However, when performance is measured as Tobin’s Q, the results remain inconclusive. (Less)
Please use this url to cite or link to this publication:
author
Nordenlöw, Gustaf LU and Thufvesson, Balder LU
supervisor
organization
course
NEKN02 20211
year
type
H1 - Master's Degree (One Year)
subject
keywords
capital structure, leverage, firm performance, OMX30, agency cost of debt
language
English
id
9051706
date added to LUP
2021-10-26 08:16:56
date last changed
2021-10-26 08:16:56
@misc{9051706,
  abstract     = {{The purpose of this thesis is to examine the relationship between varying leverage ratios and performance for large Swedish firms. With a recent trend of decreasing borrowing rates, it is more common for Swedish firms to have a larger portion of debt on their balance sheets. This trend makes it important to understand the effects changing leverage has on firm performance. The relationship between leverage and performance is examined by observing data from the constituents of the OMX30 index between 2000 and 2020. Firm performance is measured as return on assets, return on equity and Tobin’s Q. Each performance measurement is regressed on capital structure proxies and a set of control variables. The main findings seem to confirm that there is a negative link between leverage and firm performance when performance is measured on a return basis, although only statistically significant on the level of 10%. In turn, this seems to suggest that firms with more debt underperform relative to its peers and that firms sacrifice performance when issuing debt. This supports the agency cost of debt theory inasmuch as the negative link indicates firms’ returns are lower after increasing their leverage. However, when performance is measured as Tobin’s Q, the results remain inconclusive.}},
  author       = {{Nordenlöw, Gustaf and Thufvesson, Balder}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Capital structure and firm performance: A study on Sweden’s OMX30 index}},
  year         = {{2021}},
}