The Rationale Behind Capital Structure Decisions
Does Theory Explain Practice?
Trade-OffCapital StructurePecking-OrderMarket TimingSignallingProduct-Market CompetitionManagement of enterprisesFöretagsledningManagementBusiness and Economics
The purpose of this thesis is to through the analysis of interviews with finance professionals in listed companies answer the question on what lies behind capital structure decisions, and to see how well the prevailing theories fit the answers. This article is an explorative and descriptive hypothesis creating study. We have used a qualitative method to analyse practice through theory. We have conducted telephone interviews with CFO:s and financial executives in Swedish listed companies on how they reason when they make capital structure decisions. We have then thoroughly reviewed the theory and empirical tests of the theories. Through the five theoretical perspectives; Trade-Off, Pecking-Order, Market Timing, Signalling and Product-Market Competition, we have analysed the answers. After that, we have created hypotheses that answer our purpose. Our conclusions come in the form of hypotheses. There are eight hypotheses and a number of sub-hypotheses. In short, we essentially find that the theories on capital structure are too normative, and do not fit practice. We also find that companies mainly consider flexibility, covenants, cash-flow, credit rating, interest rates and strategy when making capital structure decisions.