An empirical investigation of the optimal capital structure of companies listed at OMX Nasdaq Helsinki stock exchange

Abstract

In corporate finance, capital structure can increase the firm value through the benefits of debt financing. The aim of this study is to analyze the capital structure of all companies listed at Nasdaq Helsinki stock exchange in the period from 2001 to 2020. The thesis deals with questions of how aggressively (conservatively) the companies issue debt in their capital structure and quantifying the benefits and the costs of debt financing. Then, finding the firm’s optimal financial leverage. Research questions are answered by simulating the expected marginal tax rate of each firm in each year, forming their marginal benefit of debt curves, and consequently applying the regression model to estimate the marginal cost of debt financing function which incorporates the firm-specific characteristics.

On average 70% of expected marginal tax rates of the subject companies are equal to the statutory corporate income tax rate, while this portion is only one-third in the case of U.S companies. Combining with visualizing the firms’ benefit of debt curves, it is concluded that the listed firms spend debt rather conservatively. Next, the tax benefit of debt of these businesses is calculated at 0.542%, while this number equals approximately 10 percent in the U.S economy. Finally, when both the benefit curve and the cost curve are acquired, the firm’s suggested optimal leverage is the intersection between these two curves.