Capital Structure Determinants - Capital structure determinants for large listed Norwegian and foreign public firms


Publication date



Oslo and Akershus University College of Applied Sciences

Document type


Master i økonomi og administrasjon


The ultimate goal of all the firms in the market is to maximize the firm value and the wealth of shareholders. The empirical data suggests that such goals can be achieved by an optimal combination of debt and equity which may result in a low average weighted cost of capital to the firm. An appropriate choice of capital structure based on firm, industry and country level explanatory factors could influence their path of capital growth. So far, many empirical studies have been carried out to identify and explain the contributing factors to influence the choice for a particular capital structure suitable to any individual firm or group of firms. Ironically, such studies with particular reference to the firms operating in the capital market of Norway are few and far between. Realising this vacuum, the current study is a humble effort to explore and identify the most significant factors, both at firm and country level, which affect the choice of capital structure of some of the largest domestic and foreign firms listed on Oslo Børs. Quarterly data of largest 29 domestic and 34 foreign firms for the past five years (2011 to 2015) has been collected from Thomson Reuter’s data stream for the purposes of analysis. To maintain uniformity, financial firms including banks and insurance companies have been excluded from the sample. With view to enhance the reliability of the tests, two separate models on the book value of leverage as dependent variables (short term debt and long term debt) are tested over number of independent variables on three different data sets (domestic , foreign firms and their combined data ). An attempt has been made to find out if there is a difference between foreign and local firms in the choice of their respective capital structures. Explanatory factors were derived from previous empirical studies on the same subject. Some additional factors like exchange rate, liquidity and past profitability have been included that are not studied previously on Norwegian data. The results reveal that for long-term debt ratio (LTD/TA), non-debt tax shield, inflation and exchange rate are the most significant determining factors for adopting a capital structure in both domestic and foreign firms. While, inflation is particular to domestic firms only. The results also show that for short-term debt ratio (STD/TA), non-debt tax shield again is a significant explanatory factor along with tangibility and exchange rate at a lesser scale. Domestic firms prefer short-term debt but foreign firms prefer long-term debt as a source of external financing. Support of trade-off theory for both short term and long term debt in capital structure of listed firms in Norway is an obvious outcome of the results.


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