The Debt-Equity Dilemma : An analysis of the co-movement between Swedish stocks and bonds

University essay from Umeå universitet/Företagsekonomi; Umeå universitet/Företagsekonomi

Abstract: Throughout the last century there has been an extensve discussion regarding the optimal capital structure.Excessive research has further been conducted to understand the relationbetween the market debt and equity on an aggregated market-level. However, it is observed that the research on thefirm-specific co-movement of stock and bondsis scarce. Since the last financial crisis,the bond market has especiallyseen a rapid growth. The growthstemsfrom the low interest rate climate togetherwithmore restrictive lending policies from banks. Based on this discussion the purpose of this research is to investigate if Swedish corporationsare making the optimal capital structure decision. This based on a potential co-movement of stocks and bonds. To answer the purpose the research question was therefore: What is therelationship between a corporation’s bond returnand stock return?The scientific method that was used in this research is a quantitative method witha deductive process and a positivistic angle. Because the research uses the whole population that is available, this is a censusstudy. In the population companies that have been active on the stock and the bond market sometime during the period from 2008 to 2018. Although, companies that have been delisted during this period have been excluded. From a population of 75 companies and 1972 observations, two regressions were made due to the inconclusive results regarding the dependency of stock return and bond return. No significant result between the returns was found. However, a significant result between marketcapitalizationand the returns togheter with stock standard deviation and the returns was found. Based on the result, the authors could conclude that there seems to be a demand for the issuance of both stocks and bonds. This follows a discussion regarding the possibility of diversification of the securities based on the modern portfolio theory. Further, the authors can conclude that the theories regardin the irrelevance of capital structure are applicable. Finally,the authors can conclude that the stakeholder theory can explain the value creation in a more appropriate fashion in relation to the result. The authors canthereforeconclude that the debt-equity dilemma still is present and further research within the area is required.

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