Determinants of Capital Structure in the Swedish Dairy Farm Industry

Abstract: We have examined the capital structure of the Swedish dairy farm industry and the driving forces behind this capital structure. This industry has undergone some major changes during modern time. These changes constitutes mainly of the number of farms and technological development. This, in combination with reported low profitability in the industry, has sparked a high media coverage about the survivability of the agricultural industry due to its important social function. The survivability of a business can be seen in its capital structure since that contains long term debt that can force a firm to become bankrupt and also the equity that contain retained earnings that can help a company weathering periods of low profitability.   Research question: How can a change in debt level for firms in the Swedish dairy farm industry be explained by financial investment theory and financial variables?   We formed three objectives in order to answer the research question. The first one was to examine how financial investment theory can explain the change in debt level. The second objective was to analyze relevant financial variables to find additional indicators of influence from investment theory as well as compare our results to previous research. The final objective was to analyze financial variables to substantiate our findings and find further explanations to the capital structure of the industry.   The theories used in order to explain the capital structure are the Pecking order theory and the Static trade-off theory. Both theories are established theories in capital structure research. The Pecking order theory states that different capital financing option follow a strict hierarchy with internal capital as the primary choice, debt financing as secondary and the equity financing option as the least preferable option. The Static trade-off theory states that there is an optimal debt level that companies strive towards. This optimal level depends on the interest tax shield and bankruptcy costs. We performed a quantitative study with a deductive approach to perform this study. The sample comprised of annual financial information from 100 Swedish dairy farms during the period 2000-2013. Criteria was formed in order to sample full-time limited liability companies.   The results show that the Pecking order theory was the most significant determinant for the change in long term debt. The Static tradeoff model showed some incompatibility with our population, reducing its reliability.  The indicator variables size, asset structure and growth was found to be positively related to the debt levels, while the profitability was negatively related to all debt variables. The risk of the firm was only significantly negative for long term debt and leverage ratio.   The Pecking order theory showed to be predominant in the Swedish dairy farm industry. This is substantiated by the indicator variables taken together and by the descriptive statistics. We also found that on average, the industry is suffering from low profitability and struggled to make profitable investments although the profitability differs a lot within the sample.