In this paper we study the pecking order and tradeoff theories of capital structure on a sample of 121 Swedish, non-financial, listed firms over the period between 2000 - 2009. We find that the Swedish firms’ financing behavior appears to have features consistent with the predictions of both theories. The evidence shows a preference for a financing behavior consistent with the tradeoff theory for the whole sample and for a sample of small firms, whereas large firms appear to follow a pecking order on their financing decisions. We show that under sufficient conditions both theories might be seen as “reconciled” and not mutually exclusive, and we find evidence for the large firms of our sample consistent with this notion.

Companies need capital in order to run their business, do necessary investments and grow larger. These actions are combined with high costs where both internal and external financing might be appropriate. Capital structure is the relation between debt and equity. In this thesis we have focused on the decision behind the capital structure. We have focused on the road freight industry and we have tried to find out how management reason about their decision. The purpose of this thesis is therefore to describe and analyze SMEs’ decision of capital structure within the road freight sector in the Jönköping region. Emphasise is put on the different aspects that influence the capital structure decision and to what extent this is a strategic issue coloured by personal beliefs. To fulfill the purpose mainly a qualitative approach with primary data from structured interviews has been used. The interviews were conducted face-to-face with six owner and/or managers. Further on, secondary data from the firms’ annual reports were used and analyzed. The pecking order theory explains that firms, especially SMEs, prefer to finance their businesses with internally generated funds. Focus of the theoretical part are on theories of what factors that affects the capital structure decision, how this can be argued to be a strategic question for SMEs, how risk affects the capital structure decision and how this decision is made in a family business. These theories are presented to shed light on the capital structure decision making process of SMEs. From this study it is found that the majority of the companies’ prefer internal financing i.e. reinvested earnings, and as a second alternative to use debt in form of bank loans. The study also shows that the reasons behind this preferred order are the will of being independent, previous experience and managements’ risk-taking propensity. We believe that these factors combined with beliefs about debt and realized need for debt works as a base for how a capital structure strategy is discussed, formed and developed. From this study it can also be concluded that risk indirect affects the capital structure decision and that a restrictive view on debt leads to a restrictive desire to grow since a fast growth in most cases needs to be financed by debt. Last, the study concludes that even though the studied firms prefer to finance with retained earnings they all use debt more or less.

This volume consists of four papers, which in principle could be read in any order. The common denominator is that they deal with contingent claims models of a firm's securities or related derivatives. A Framework for Valuing Corporate Securities Early applications of contingent claims analysis to the pricing of corporate liabilities tend to restrict themselves to situations where debt is perpetual or where financial distress can only occur at debt maturity. This paper relaxes these restrictions and provides an exposition of how most corporate liabilities can be valued as packages of two fundamental barrier contingent claims: a down-and-out call and a binary option. Furthermore, it is shown how the comparative statics of the resulting pricing formulae can be derived.A New Compound Option Pricing ModelThis paper extends the Geske (1979) compound option pricing model to the case where the security on which the option is written is a down-and-out call as opposed to a standard Black and Scholes call. Furthermore, we develop a general and flexible framework for valuing options on more complex packages of contingent claims - any claim that can be valued using the ideas in chapter 1. This allows us to study the interaction between the detailed characteristics of a firm's capital structure and the prices of for example stock options.Implementing Firm Value Based ModelsThis paper evaluates an implementation procedure for contingent claims models suggested by Duan (1994). Duan's idea is to use time series data of traded securities such as shares of common stock in order to estimate the dynamics of the firm's asset value. Furthermore, we provide an argument which allows us to relax the (common) assumption that the firm's assets may be continuously traded. It is sufficient to assume that the firm's assets are traded at one particular point in time.Asset Substitution, Debt Pricing, Optimal Leverage and MaturityChapters 1-3 have focused on the problem of pricing corporate securities.They have thus abstracted strategic aspects of corporate finance theory. This paper is an attempt to combine the contingent claims literature with the non-dynamic corporate finance literature. I allow the management of the firm to alter its investment policy strategically. This yields a model which allows us to examine the relationship between bond prices, agency costs, optimal leverage and maturity. / Diss. Stockholm : Handelshögsk.

This study investigates the capital structure pattern on the Nordic Banking sector, and analyzes if the macroeconomics conditions have an impact on it. The topic is timely and relevant as the credit crises, which has reached the real economy strongly, appears to lead to a restructure of the capital structure of the firms. To achieve my objective I have observed the debt-to-equity ratio in the period 2003-2008. I conducted correlation analysis and further regression analysis to search for a relationship between the variables and then a cause-effect relation between the macroeconomic measures and the capital structure. In order to understand and select the macroeconomics measures to this investigation I have reviewed well known theories and studies about the subject.   I have found a stable debt-to-equity ratio on the book value; however to the market value the figures indicate a decrease in equity value, especially in the last year. In order to search for a macroeconomic relationship, I have developed hypotheses and examined them to select the most suitable variables to a regression analysis. The choice was the change in the GDP, the interest rate and tax rate.   The results revealed that the book value is better explained by these measures than the market value. They demonstrate statistical significantly, highlighting the change in GDP. Even if the findings suggest that there is a correlation between the macroeconomic condition and the capital structure, the analyses suggest only moderate relationship, that should be further investigate.

Financial bubbles are characterized by a large increase in the economic growth on the market as a whole or in specific industries. The change gives rise to an increase in the capital needed to finance this growth. Companies typically have a choice between equity and debt capital to finance its business and the mix of these types of capital is often referred to as the company’s capital structure. There has been a lot of research done in the field of financial bubbles and of capital structure, as of yet no studies seem to address these two areas in combination. The aim of this study is to examine if financial bubbles affect a company’s capital structure and through this also examine if the supposed changes in capital structure can be generalized. The study comprise of two identical time-series which examines the changes in leverage and the choice of financing during the Swedish real estate bubble in the early nineties and the IT-crash at the end of the 2000th century. The study examines changes in leverage, price-to-book ratio and the choice between issuing convertible debt versus issuing equity, of eleven real estate companies and twelve IT-companies respectively. This paper shows that a company’s capital structure is indeed affected by a financial bubble though the way it is affected during different financial bubbles differs. Significant changes in leverage and the choice between different types of financial instruments are identified in both time-series. The study also shows that neither the Pecking Order Hypothesis as presented by Myers (1984) nor the traditional trade-off theory can in whole explain these changes. A significant difference in leverage between the two groups can be identified which is consistent with earlier empirical studies on the difference between capital structures in different industries. The results in this study seem to indicate that the changes in capital structure can be explained either by a supposed disturbance in the cost of different types of capital during the financial bubble or by the assumption that companies in specific industries (as the IT-industry) do not have the possibility to chose the type of financing freely.

Previous research on the tradeoff between operating and financial leverage has come to contradicting results, thus, there is no consensus of opinion regarding van Horne’s tradeoff theory. This study investigates whether there is support for the tradeoff theory on a sample of 347 Swedish, listed firms. Unlike previous studies, we employ a method with direct measures using guidance provided by Penman (2012), rather than using the more common degree of operating and financial leverage as proxies. During the time period 2006-2011 we find a statistically significant negative relationship of 0.214 using an OLS regression with financial leverage as the dependent variable, giving support for the tradeoff theory. The adjusted explanatory power (adjusted R2) is however rather low, despite adding four control variables, reaching only 7.4%.

In this thesis we study problems in the context of inventory control and facility location. In chapter 2 we study the competition among risk averse newsvendors. We showed that the well-known result for the single-product monopoly firm, which states higher risk aversion causes the firm to reduce its order quantity, cease to hold under the competition. We concluded that the higher risk aversion does not necessarily cause both firms to reduce their order quantity. We showed that the impact of risk aversion on equilibrium quantities is a trade-off between two effects: (a) Own risk aversion increment which causes that the firm reduces its order quantity and (b) Effect of spillover demand from competitor which causes that the firm increases its order quantity. We also show which firm raises its order quantity as both firms become more risk averse depending on their attributes: profitability ratio (overstocking to understocking ratio), initial risk aversion level and demand characteristic (distribution and substitution). In Chapter 3, we study how the operational decisions of a firm's manager depend on her own incentives, the capital structure, and financial decisions in the context of the newsvendor framework. We showed that in contrast to common practices, tying the manager's compensation to stock price (equity value) may not be optimal for shareholders. We propose to tie the managers' compensation to the firm value or include a debt-like instrument in the compensation package to mitigate the risk taking behaviour of the managers. We also show how the board of directors can modify the compensation structure based on the state of the economy and publicly available information about company's demand. In Chapter 4, we study the effect of risk attitude of decision makers on well-known location problems with uncertain demand. In addition to providing mathematical formulations for those problems, we also discussed how we can solve these problems using linearization techniques. We also shed some light on the importance of considering the volatility and correlation structure. Furthermore, we apply a Bayesian updating method, a useful tool for updating the probability distribution to incorporate the consultants' view about uncertain factors in location problems.

This thesis consists of three empirical studies on the economics of organization using novel data on organizations for analysis. Chapter 1 uses the longitudinal and nationally representative data from Statistics Canada's Workplace and Employee Survey to examine the distinct effects of Information and Communication Technology (ICT) on decentralization of decision rights. Using a sample of workplaces from different sectors and controlling for unobserved workplace-level heterogeneity, I find that decentralization (defined as the case when workers can plan work for themselves) is more likely when database software is used (which reduces learning cost) but is less likely when communication system is used (which reduces communication cost). These results are consistent with the predictions of the organizational model by Garicano (2000). Chapter 2 also uses the data from Workplace and Employee Survey and examines the impact of competition on the quality of the middle management in terms of the use of Human Resources Management (HRM) practices. I find that increased competition leads to an improvement in managerial quality, proxied by the use of HRM practices. These results complement the industry-specific evidence documented in the literature. Chapter 3, co-authored with Professor Varouj A. Aivazian, uses the management score of Bloom and Van Reenen (2007) as a proxy for managerial quality to examine the extent to which market structure interacts with capital structure. We find that leverage is negatively related to competition (measured by Import Penetration Ratio, Lerner Index, and Herfindahl-Hirschman Index). Besides, we find that competition is positively associated with managerial quality, and that managerial quality is in turn negatively related to leverage. We conclude that managerial quality explains the impact of competition on leverage which suggests that managerial quality serves as an important link between capital structure and market structure.

This paper examines the relationship between female participation in top management and firm performance and capital structure. Additionally, we assess whether this relationship differs at Female Friendly versus Non-Female Friendly firms. Today, women account for nearly half of the total labor force, but constitute less than one tenth of Fortune 500 Top Earners. This warrants further exploration, and thus, we hope to understand the impact gender has on firm value. After controlling for industry, size, age, leverage, and other firm specific measures, we find that female participation in top management is associated with a higher interest coverage ratio. We then investigate the difference between firm classifications and find that Female Friendly firms tend to outperform their Non-Female Friendly counterparts on the basis of operating profit margin and tend to carry a more levered capital structure. This exploration offers foundational evidence to fuel a new direction for this conversation—enacting corporate policies that better accommodate the female talent pool may allow firms to access a source of competitive advantage.

This thesis consists of three empirical studies on the economics of organization using novel data on organizations for analysis. Chapter 1 uses the longitudinal and nationally representative data from Statistics Canada's Workplace and Employee Survey to examine the distinct effects of Information and Communication Technology (ICT) on decentralization of decision rights. Using a sample of workplaces from different sectors and controlling for unobserved workplace-level heterogeneity, I find that decentralization (defined as the case when workers can plan work for themselves) is more likely when database software is used (which reduces learning cost) but is less likely when communication system is used (which reduces communication cost). These results are consistent with the predictions of the organizational model by Garicano (2000). Chapter 2 also uses the data from Workplace and Employee Survey and examines the impact of competition on the quality of the middle management in terms of the use of Human Resources Management (HRM) practices. I find that increased competition leads to an improvement in managerial quality, proxied by the use of HRM practices. These results complement the industry-specific evidence documented in the literature. Chapter 3, co-authored with Professor Varouj A. Aivazian, uses the management score of Bloom and Van Reenen (2007) as a proxy for managerial quality to examine the extent to which market structure interacts with capital structure. We find that leverage is negatively related to competition (measured by Import Penetration Ratio, Lerner Index, and Herfindahl-Hirschman Index). Besides, we find that competition is positively associated with managerial quality, and that managerial quality is in turn negatively related to leverage. We conclude that managerial quality explains the impact of competition on leverage which suggests that managerial quality serves as an important link between capital structure and market structure.