Determinants of Capital Structure - Testing the Pecking Order Theory on the Swedish Construction Industry

Abstract: Building new homes and oÿces are vital for the well-being in a country from both an economic sense and from a viewpoint that a growing population needs more housing. For construction companies to be able to meet their objectives, an important issue is the capital structure choice. The discussion of capital structure and company value became one of the most contentious areas in finance in the decades following the publication of the famous paper by Modigliani and Miller. Since then, there has been a lot of work exploring the optimal capital structure for firms in di˙erent situations, however the work has been rather limited in Sweden. This study tested the pecking order theory of capital structure on publicly traded Swedish construction firms between 1995 to 2019. The study had a focus on how well the pecking order theory can account for financial decisions made by Swedish construction firms through a series of tests. The purpose is to understand what factors are the most important, with regards to the capital structure, for listed firms in the Swedish construction industry. The result of the tests showed that the pecking order theory failed to outperform the conventional leverage model. Therefore, the study was unsuccessful in finding support for the hypothesis that the pecking order theory would be the dominant financial theory to explain capital structure decisions.