The linkage between liquidity management and capital structure- a comparative analysis essay between real estate and IT companies in Sweden

Abstract

This thesis tries to contribute to corporate finance through the study of the link between liquidity and capital structure of two different sectors in Sweden. The link between liquidity and capital structure is ambiguous and previous studies about the subject indicates inconsistent relationships between them. Some researchers proclaim a positive correlation whereas others assume that it is a negative correlation or no correlation . Moreover, all the above research related to the relation between the liquidity and capital structure was conducted on a combine or a separate analysis. Thus, our study underlines the fact that a comparative analysis between different sectors is required.

The aim of the thesis is to conduct a comparative analysis by investigating the linkage between capital structure and liquidity of firms in IT and real estate sectors. In order to accomplish the aim of the thesis two research questions have been established. The first research question addresses a literature study of the linkage between liquidity and capital structure. This lays out as a basis for examining and analyzing the second research question. Furthermore, in order to answer the second research question a quantitative research strategy has been pursued. This comprised an analysis of historical data for companies in IT and real estate sectors. Data have been gathered from annual reports between 2003 and 2014 for 11 IT companies and 12 real estate companies listed on Nasdaq OMX. Moreover, a simple regression analysis has been performed to investigate the relationship between liquidity and capital structure. The analysis was done by using a statistical program called JMP.

The results from this thesis indicate that there is a correlation between liquidity and capital structure in both sectors. What is interesting though is that there seem to be different correlations between the sectors. In the case of real estate companies the result shows a positive correlation whereas the result for the IT companies depictures a negative correlation instead. This is an interesting observation that invites further studies on the subject.