Capital Structure Determinants in Large Real Estate Firms : A Panel Data Study of Post-Crisis Sweden (2009-2017)

Abstract: The real estate industry is one of the oldest sectors in the world, having existed almost as long as humans have roamed around the earth. Despite the social system in place, the ownership of land and buildings has always been a great source of prosperity to their owner. In addition to creating profit, the real estate sector also contributes to the health of the economy and to the well-being of people by providing necessities such as properties to organizations and individuals and by facilitating economic activities. This panel data study fills a knowledge gap by examining the development of large Swedish real estate companies’ capital structures between the years 2009 and 2017. The research tries to comprehend how the structures have changed during the business cycle following the financial crisis. The sample, consisting of 901 large stock companies, also tries to explain why these changes have occurred by analyzing which factors determine the development of the capital structure. Variables Return of Equity (ROE), Return of Assets (ROA), Assets, Number of Employees, Cost of Debt, Debt Coverage ratio (ICR), Interest Rates, and Stock Index are statistically tested in order to identify relationships between leverage and the given variables. The findings concerning the development of leverage ratios indicate that the Swedish firms, regardless of the amount of debt they possess, are deleveraging. Although the growth trend changes are subtle, they give evidence against the common belief that firms are packing up more debt. Relationships between the variables were all significant except for the relationships between Leverage/Interest Rates and Leverage/Stock Index which yielded conflicting results. Positive relationships were identified between Leverage/Assets, Leverage/ROE, Leverage/ICR, and Leverage/Interest Rates. The associations between the variables Leverage/Employees, Leverage/ROA, Leverage/Cost of Debt, and Leverage/Stock Index were negative. Although most results are in line with the previous research, some surprises were also discovered. Considering the fact that the Swedish market is relatively poorly understood, the area of real estate capital structure determinants still requires further research to understand what truly drives firms to change their debt and equity composition.