Leverage and Firm Value: The Case of Listed Nordic Real Estate Firms : An empirical study of the relationship between leverage and market value

Abstract

In this thesis we examine the relationship between leverage and firm value for 31 listed Nordic real estate companies for the period Q1 2006 to Q2 2021. We use enterprise value to invested capital (EV/IC) as a measurement of firm value, which will be the dependent variable throughout the analysis. Further, we have split the leverage component of each company in two ratios: i) Long-term debt to total assets (LTD), and ii) Short-term debt to total assets (STD). Both ratios are measured in terms of book values. Additionally, to analyse a potential non-linear relationship between the debt-ratios and firm value, we have included a squared term for i) and ii). The relationship between these four independent variables and EV/IC will be the main point of interest in this thesis. We motivate our thesis theoretically in view of the trade-off theory and the information asymmetry theory. Based on a multiple regression model using fixed effects estimation, we identify a strictly concave relationship between long-term debt and EV/IC. Our results indicate that listed Nordic real estate companies benefit from long-term debt to a certain extent. Although, high LTD ratios are value deteriorating as our results show that the squared term of LTD is negatively associated with firm value. Our empirical findings further suggest a convex relationship between short-term debt and firm value. We find market valuation of listed Nordic real estate companies to be significantly related to most of the chosen independent variables. In specific, we find EV/IC to have a significant relationship with the following variables: LTD (+), LTD Squared (-), STD (-), STD Squared (+), tangibility (+), size (+), growth (-), and the global financial crisis (-). Based on our empirical evidence, we find that that both the trade-off theory and information asymmetry theory have useful explanatory power in describing the relationship between LTD and firm value. Meanwhile, we find that the applicability for of our theoretical framework comes to short in predicting the relationship between STD and firm value.