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Determinants of Changes in Capital Structure on the Nordic Market

Sandu, Andrei LU and Korneva, Anastasia LU (2010) NEKM07 20101
Department of Economics
Abstract
This study investigates how the debt levels of firms belonging to the Nordic market change over time and what determines these changes. We find that contemporaneous changes in leverage are mainly determined by profitability, market timing, leverage deficits (deviations from target leverage) and changes in targets. We find two factors whose effects persist for at least ten years, namely profitability and yearly timing. Moreover, leverages deficits measured at the beginning of a ten-year period and changes in target leverages over a ten-year period have very strong and highly significant effects on changes in actual leverage over the whole ten-year period, as well as on changes in the last five years of the period. We also document... (More)
This study investigates how the debt levels of firms belonging to the Nordic market change over time and what determines these changes. We find that contemporaneous changes in leverage are mainly determined by profitability, market timing, leverage deficits (deviations from target leverage) and changes in targets. We find two factors whose effects persist for at least ten years, namely profitability and yearly timing. Moreover, leverages deficits measured at the beginning of a ten-year period and changes in target leverages over a ten-year period have very strong and highly significant effects on changes in actual leverage over the whole ten-year period, as well as on changes in the last five years of the period. We also document profitability and long-term timing to partially reverse, which shows that managers take action in order to offset the changes that caused their firms to deviate from their target debt ratios. Our findings show that firms do have target capital structures which are consistent with the trade-off theory of capital structure, but factors such as history variables, changes in target leverage and leverage deficits cause deviations from these targets. However, there is a tendency for some of the history variables to reverse, showing that targets are of importance and firms tend to slowly adjust their capital structure to meet them. (Less)
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author
Sandu, Andrei LU and Korneva, Anastasia LU
supervisor
organization
course
NEKM07 20101
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Capital structure, trade-off, target, leverage deficit, reversion
language
English
id
1614280
date added to LUP
2010-06-17 11:15:27
date last changed
2010-06-17 11:15:27
@misc{1614280,
  abstract     = {This study investigates how the debt levels of firms belonging to the Nordic market change over time and what determines these changes. We find that contemporaneous changes in leverage are mainly determined by profitability, market timing, leverage deficits (deviations from target leverage) and changes in targets. We find two factors whose effects persist for at least ten years, namely profitability and yearly timing. Moreover, leverages deficits measured at the beginning of a ten-year period and changes in target leverages over a ten-year period have very strong and highly significant effects on changes in actual leverage over the whole ten-year period, as well as on changes in the last five years of the period. We also document profitability and long-term timing to partially reverse, which shows that managers take action in order to offset the changes that caused their firms to deviate from their target debt ratios. Our findings show that firms do have target capital structures which are consistent with the trade-off theory of capital structure, but factors such as history variables, changes in target leverage and leverage deficits cause deviations from these targets. However, there is a tendency for some of the history variables to reverse, showing that targets are of importance and firms tend to slowly adjust their capital structure to meet them.},
  author       = {Sandu, Andrei and Korneva, Anastasia},
  keyword      = {Capital structure,trade-off,target,leverage deficit,reversion},
  language     = {eng},
  note         = {Student Paper},
  title        = {Determinants of Changes in Capital Structure on the Nordic Market},
  year         = {2010},
}