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The Relationship Between Profitability and Leverage - A study on Swedish non-financial firms

Johansson, Lars LU and Sangberg, Fredrik LU (2012) BUSN88 20121
Department of Business Administration
Abstract
The purpose of this study is to increase the understanding of profitability’s relationship to leverage by presenting evidence of Swedish non-financial firms listed on the OMX Nordic Stockholm stock exchange. The thesis will discover how the relationship differs across firm size as well as how the relationship differs between different market conditions.
The study takes a deductive approach with a quantitative strategy. Panel data regressions are used to determine the relationship. Further, multiplicative interaction models are used to account for firm size and market conditions.
Static trade-off theory, Pecking order theory and Market timing hypothesis are the ground theories of the thesis. Further, previous empirical literature on the... (More)
The purpose of this study is to increase the understanding of profitability’s relationship to leverage by presenting evidence of Swedish non-financial firms listed on the OMX Nordic Stockholm stock exchange. The thesis will discover how the relationship differs across firm size as well as how the relationship differs between different market conditions.
The study takes a deductive approach with a quantitative strategy. Panel data regressions are used to determine the relationship. Further, multiplicative interaction models are used to account for firm size and market conditions.
Static trade-off theory, Pecking order theory and Market timing hypothesis are the ground theories of the thesis. Further, previous empirical literature on the relationship between firm size and capital structure as well as market conditions and capital structure are important sources in the paper.
The empirical foundation is over 30 years for 614 non-financial firms listed on the OMX Nordic Stockholm stock exchange.
We conclude that Profitability’s relationship to leverage is negative for the non-financial firms listed on the OMX Nordic Stockholm stock exchange. We find results concluding that firm size has a significant impact on the relationship. However, depending on which definition of leverage used, the relationship differs. When accounting for a third dimension, market condition, the conclusion is that there is no significant relationship. (Less)
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author
Johansson, Lars LU and Sangberg, Fredrik LU
supervisor
organization
course
BUSN88 20121
year
type
H1 - Master's Degree (One Year)
subject
keywords
Capital structure, Static trade-off theory, Pecking order theory, Market timing hypothesis, Multiplicative interaction model.
language
English
id
2796110
date added to LUP
2012-06-27 15:28:49
date last changed
2012-06-27 15:28:49
@misc{2796110,
  abstract     = {The purpose of this study is to increase the understanding of profitability’s relationship to leverage by presenting evidence of Swedish non-financial firms listed on the OMX Nordic Stockholm stock exchange. The thesis will discover how the relationship differs across firm size as well as how the relationship differs between different market conditions.
The study takes a deductive approach with a quantitative strategy. Panel data regressions are used to determine the relationship. Further, multiplicative interaction models are used to account for firm size and market conditions.
Static trade-off theory, Pecking order theory and Market timing hypothesis are the ground theories of the thesis. Further, previous empirical literature on the relationship between firm size and capital structure as well as market conditions and capital structure are important sources in the paper.
The empirical foundation is over 30 years for 614 non-financial firms listed on the OMX Nordic Stockholm stock exchange.
We conclude that Profitability’s relationship to leverage is negative for the non-financial firms listed on the OMX Nordic Stockholm stock exchange. We find results concluding that firm size has a significant impact on the relationship. However, depending on which definition of leverage used, the relationship differs. When accounting for a third dimension, market condition, the conclusion is that there is no significant relationship.},
  author       = {Johansson, Lars and Sangberg, Fredrik},
  keyword      = {Capital structure,Static trade-off theory,Pecking order theory,Market timing hypothesis,Multiplicative interaction model.},
  language     = {eng},
  note         = {Student Paper},
  title        = {The Relationship Between Profitability and Leverage - A study on Swedish non-financial firms},
  year         = {2012},
}