The impact of the financial crisis on corporate capital structure dynamics in the nordic countries

The concept of corporate capital structure is dynamic in nature as the changing economic and business situations influence on it. Financial crisis of 2007-2008, among other things, have led companies to bring important changes in their capital structure. In turn, capital structure has also influenced corporate risks and the weighted average cost of capital of the firms. However, this topic is under-researched in general and in the context of Nordic countries, in particular. This paper examines the determinants that have affected firm-level corporate capital structure across Nordic countries during the financial crisis sub-period (2007-10). In addition, we also study and compare the same phenomenon during the pre (2003-06) and post financial crisis (2011-17) sub-periods. The principal finding of the study underlines that during the pre-financial crisis period, firms producing high accounting- and market returns borrow less, thus rendering their capital structure more towards equity capital as more debt increases fixed cash outflows in the form of debt servicing. However, during and post financial crisis sub-periods firms giving better performance, with reference to the same benchmarks, borrow more. Several factors can be attributed this finding such as high risk premium to the equity investments due to adverse equity investment climate, falling interest rates during the financial crisis and increasing non-performing assets accumulated with banks. The current paper contributes to the body of knowledge, both academic and practitioners, in several ways. First, the study identifies the key determinants affecting capital structure in the pre, during and post financial crisis sub-periods and thus portraying a comprehensive and indepth picture. Second, the study explores how the capital structure affects the risk and weighted average cost of capital (WACC)