Capital Structure and Stock Returns - A study of the Swedish large cap companies

Abstract

This study uses multiple regression models to examine how capital structure and stock returns affect each other. Using a panel data study that includes 50 Swedish companies over a period of five years, the results show that leverage has a positive effect on stock returns. The results also shows that the pecking order theory best explains the behaviour of Swedish companies listed on large cap during the period after the financial crises, 2009–2013. Therefore a high leverage leads to a demand of higher stock returns from the investors and companies prefer to use debt rather than equity. We have found that profitability negatively affects leverage and growth positively affects stock returns. Size has a significant effect on both leverage and stock returns, liquidity has a positive effect on stock returns and volatility has a significant effect on leverage. Stock returns have no significant effect on leverage and growth has no significant effect on leverage.