Capital Structure Determinants in the Baltics: Evaluating Theories and the Impact of COVID-19

Abstract

The study investigates the applicability of capital structure theories in the Baltic region, focusing on firm-level determinants and the impact of the COVID-19 pandemic. It aims to evaluate to what extent the Trade-off theory, Pecking order theory, and Agency theory can explain the leverage levels among listed firms in Estonia, Latvia, and Lithuania. The research employs regression models with leverage ratios as dependent variables, incorporating various firm-specific determinants and a dummy variable for the COVID-19 period. Results indicate that while the theories can partly explain capital structure decisions, there are significant differences across the Baltic countries. A combination of the theories is found to be the most suitable for explaining the capital structure determinants, with the Pecking Order theory being the single most suitable theory. Furthermore, the study finds that the COVID-19 pandemic led to an increase in total debt ratios, suggesting that firms opted to raise leverage in response to the crisis. This research enhances the understanding of capital structure dynamics in the Baltics and highlights the need for future studies to explore additional country-level and macroeconomic factors, with the findings being most relevant for policymakers, financial managers, and researchers interested in capital structure decisions in emerging markets.