Capital Structure Volatility: Is capital structure constant or a varying residual?

Abstract: This paper examines the phenomenon of capital structure instability among private- and publicly listed firms in Sweden during the years 2000-2016. We observe a high level of capital structure volatility among private firms, while public firms appear to be more stable. Private firms are on average of smaller size and possess lower operating profitability than public firms. These are key characteristics of firms with high capital structure volatility. The observed debt instability among private firms is mainly driven by volatility in operating activities and in particular net working capital fluctuations. Collectively, private firms appear to treat debt as a varying residual from other firm policies, such as net equity payouts, liquidity targets and capital expenditures. This study contributes to the existing research field of capital structure dynamics by taking the step into the world of privately-owned firms.