Determinants of Capital Structure in Swedish Unlisted SMEs

Abstract

This thesis investigates the determinants of capital structure among Swedish unlisted small and medium-sized enterprises (SMEs), a segment often overlooked in mainstream finance literature. Drawing on four theoretical frameworks, the Pecking Order Theory, Trade-off Theory, Agency Theory, and the Financial Growth Cycle, we examine how firm-specific characteristics influence leverage decisions. Using a panel dataset of 2,000 Swedish SMEs between 2014 and 2018, we apply fixed-effects regression models with industry and year controls. The empirical results show strong support for the Pecking Order Theory: both profitability and liquidity are negatively associated with leverage, suggesting that SMEs prioritize internal funding. The Trade-off Theory receives partial support, particularly through the positive impact of effective tax rates and asset structure on leverage. Conversely, variables such as risk, growth opportunities, and non-debt tax shields exhibit no statistically significant effects. Interestingly, firm size and age display negative relationships with leverage, challenging conventional theory and highlighting the influence of SME-specific financing constraints. Our findings underscore the limited explanatory power of traditional theories when applied to privately held firms in bank-dominated economies. The study contributes to a more context-sensitive understanding of SME financing and offers insights relevant to policymakers, lenders, and scholars interested in capital access and financial behavior in non-listed firms.