The Capital Structure Dynamics of Swedish Firms over the Business Cycle - Leverage Cyclicality and Credit Supply Contractions

Abstract: This paper focuses on the leverage dynamics of Swedish firms over the business cycle from 1987 to 2010, a period in which Sweden experienced two major recessions. Our two-part study finds evidence that Swedish firms have counter-cyclical target leverage. In contrast to previousinternational research, Swedish firms have a higher speed of adjustment towards target leverage in times of recession. Significant demand driven factors are found for financially constrained and unconstrained firms. The speed of adjustment becomes significantly higher for financially unconstrained firms during recession periods, indications which our case study supports.