The Capital Structure of Firms in the Finnish Forest Industry : A qualitative study of determinants for capital structure

Abstract

The determinants for capital structure in a firm has been of debate since Modigliani and Miller (1958) published their first paper stating that the capital structure does not affect the corporate value of a firm. Since then, new and more complex models and theories that better consider the real-world phenomena have been developed. However, these theories are suggesting almost opposite views on how capital structure in a firm is determined. This indecisiveness in the literature on capital structure suggest that one still is not able to determine what forces are behind the capital structure in a firm. Earlier research on the topic have suggested that this indecisiveness comes from the correlation problems that the research has faced (i.e., making the correlation between a capital structure and a distinct theory is very difficult) (Fama and French, 2002). Most of this previous research on the topic (Fama et al., 2002; Titman et al, 1988; Rajan et al. 1995; Michaelas et al., 1999; Flannery et al., 2006) has had a quantitative approach to their research methods (ibid.). This unbalance between quantitative and qualitative research suggests that there is a lack of research with a more qualitative approach. For testing whether a theory is in line with the practice of the firms in the real-world, qualitative research has an advantage as it gathers the thoughts and reasonings directly of the managers (Sale et al., 2002). The purpose of this paper is to analyze how firms decide upon their capital structure in the real world by taking the perspective of the practitioners in the Finnish forest industry and by doing so, see whether the reasonings of the managers are in line with any of the theories on the subject. The findings suggest that the managers in the Finnish forest industry have a more pecking-order-oriented view, than a trade-off oriented, when it comes to determining their capital structure. In some instances, the managers also conduct a more trade-off-oriented view in their reasonings, however, the findings suggest that that is due to the agency problems of capital and could be explained by the help of the agency theory, as the managers have direct or indirect pressures from the owners to increase leverage in the firm in these instances.