JÖNKÖPING INTERNATIONAL BUSINESS SCHOOL

JÖNKÖPING UNIVE RSITY

Ca pital Str uct ure Decis ion

A case study of SMEs in the road freight industry

Bachelor’s thesis within Business Administration

Author: Pernilla Franck
Malin Jidéus
Andreas Ritterfeldt
Tutor: Jan-Olof Müller
Jönköping June 2007
Bachelor’s Thesis in Business Administration
Title: Capital Structure Decision – A case study of SMEs in the road
freight industry
Author: Pernilla Franck, Malin Jidéus and Andreas Ritterfeldt
Tutor: Jan-Olof Müller
Date: 2007-06-01

Subject terms: Capital structure decision, road freight industry, SME, financial
risk

Abstract
Companies need capital in order to run their business, do necessary investments and grow
larger. These actions are combined with high costs where both internal and external financ-
ing might be appropriate. Capital structure is the relation between debt and equity.
In this thesis we have focused on the decision behind the capital structure. We have fo-
cused on the road freight industry and we have tried to find out how management reason
about their decision. The purpose of this thesis is therefore to describe and analyze SMEs’
decision of capital structure within the road freight sector in the Jönköping region. Empha-
sise is put on the different aspects that influence the capital structure decision and to what
extent this is a strategic issue coloured by personal beliefs.
To fulfil the purpose mainly a qualitative approach with primary data from structured in-
terviews has been used. The interviews were conducted face-to-face with six owner and/or
managers. Further on, secondary data from the firms’ annual reports were used and ana-
lyzed.
The pecking order theory explains that firms, especially SMEs, prefer to finance their busi-
nesses with internally generated funds. Focus of the theoretical part are on theories of what
factors that affects the capital structure decision, how this can be argued to be a strategic
question for SMEs, how risk affects the capital structure decision and how this decision is
made in a family business. These theories are presented to shed light on the capital struc-
ture decision making process of SMEs.
From this study it is found that the majority of the companies’ prefer internal financing i.e.
reinvested earnings, and as a second alternative to use debt in form of bank loans. The
study also shows that the reasons behind this preferred order are the will of being inde-
pendent, previous experience and managements’ risk-taking propensity. We believe that
these factors combined with beliefs about debt and realized need for debt works as a base
for how a capital structure strategy is discussed, formed and developed. From this study it
can also be concluded that risk indirect affects the capital structure decision and that a re-
strictive view on debt leads to a restrictive desire to grow since a fast growth in most cases
needs to be financed by debt. Last, the study concludes that even though the studied firms
prefer to finance with retained earnings they all use debt more or less.
Table of Contents
1 Introduction............................................................................. 1
1.1 Background ................................................................................... 1
1.2 Problem......................................................................................... 3
1.3 Purpose......................................................................................... 4
1.4 Definitions ..................................................................................... 4
2 Method ..................................................................................... 5
2.1 Theory testing ............................................................................... 5
2.2 Qualitative and quantitative data ................................................... 6
2.3 Primary and secondary data ......................................................... 6
2.3.1 Structured interviews .......................................................... 7
2.3.2 Interview questions ............................................................. 8
2.4 Process of work............................................................................. 8
2.5 Selected companies ...................................................................... 9
2.5.1 Interview information........................................................... 9
2.6 Reliability..................................................................................... 10
2.7 Validity......................................................................................... 11
2.8 Method criticism .......................................................................... 11
2.9 Previous capital structure thesises.............................................. 12
3 Capital Structure Theories................................................... 13
3.1 Foundation of capital structure decision theories ........................ 13
3.1.1 M&M theorem ................................................................... 13
3.1.2 Information asymmetry ..................................................... 14
3.2 Pecking order theory ................................................................... 14
3.3 SMEs strategic capital structure decision.................................... 15
3.4 Risk ............................................................................................. 17
3.5 Characteristics affecting capital structure.................................... 17
3.5.1 Special characteristics of family businesses..................... 18
4 Empirical Background ......................................................... 20
4.1 The transport sector .................................................................... 20
4.1.1 VAT regulations for light vehicles...................................... 20
4.1.2 Credit rating ...................................................................... 20
4.2 Special terms .............................................................................. 21
4.3 Calculations................................................................................. 21
4.3.1 The capital structure diagrams.......................................... 21
4.3.2 Ratio formulas................................................................... 22
4.3.3 Merging the companies .................................................... 22

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5 Empirical Findings ............................................................... 23
5.1 Overview of the companies ......................................................... 23
5.2 Claesson Transport ..................................................................... 23
5.3 June Express .............................................................................. 24
5.4 Expresstransport ......................................................................... 26
5.5 Hit&Dit ......................................................................................... 27
5.6 Alfa .............................................................................................. 28
5.7 Transflex ..................................................................................... 30
5.8 Financial ratios ............................................................................ 32
5.9 Credit officer................................................................................ 33
6 Analysis ................................................................................. 34
6.1 Analysis of capital structure......................................................... 34
6.2 Analysis of M&M theorem ........................................................... 34
6.3 Analysis of the pecking order theory ........................................... 35
6.4 Analysis of SMEs strategic capital structure decision.................. 36
6.5 Analysis of risk ............................................................................ 37
6.6 Analysis of firm characteristics .................................................... 38
6.6.1 Analysis of special characteristics of family businesses ... 40
7 Conclusion ............................................................................ 41
7.1 Discussion and suggestions for further research ........................ 42
References .................................................................................. 43
Appendecies ............................................................................... 48
Appendix 1 - Company interview questions........................................... 48
Appendix 2 - Bank interview questions .................................................. 49
Appendix 3 - Data table ......................................................................... 50

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Figures
Figure 3.1 - WACC vs. D/E .......................................................................... 13
Figure 3.2 - Capital structure decision in privately held firms using
strategic choice and theory of reasoned action......................... 16
Figure 3.3 - Hypothesized model for family business finance
antecedents and outcomes ....................................................... 19
Figure 5.1 - Short facts of Claesson Transport............................................. 23
Figure 5.2 - Claesson Transport's capital structure...................................... 24
Figure 5.3 - Short facts of June Express ...................................................... 25
Figure 5.4 - June Express' capital structure ................................................. 25
Figure 5.5 - Short facts of Expresstransport................................................. 26
Figure 5.6 - Expresstransport's capital structure .......................................... 26
Figure 5.7 - Short facts of Hit&Dit................................................................. 27
Figure 5.8 - Hit&Dit's capital structure .......................................................... 28
Figure 5.9 - Short facts of Alfa...................................................................... 28
Figure 5.10 - Alfa's capital structure............................................................. 29
Figure 5.11 - Short facts of Transflex ........................................................... 30
Figure 5.12 - Transflex's capital structure .................................................... 30
Figure 5.13 - Debt proportion ....................................................................... 32
Figure 5.14 - Return on asset....................................................................... 32
Figure 5.15 - Risk buffer............................................................................... 33
Figure 6.1 - Capital ctructure comparison .................................................... 34

Formulas
Formula 4.1 - Short-term debt ...................................................................... 21
Formula 4.2 - Long-term debt....................................................................... 21
Formula 4.3 - Equity..................................................................................... 22
Formula 4.4 - Return on asset...................................................................... 22
Formula 4.5 - Debt interest rate ................................................................... 22
Formula 4.6 - Risk buffer.............................................................................. 22

Tables
Table 2.1 - The interviewees ........................................................................ 10
Table 5.1 - Overview of the companies........................................................ 23

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 Introduction

1 Introduction
The following chapter outlines the background to the study. Issues and problems in the decision of capital
structure are highlighted. Last, the chapter gives the reader a formulation of the research questions as well as
the purpose of this study.

In order for every company to grow and expand the business they have to invest money in
different assets such as personnel, machinery and buildings. These investments are often
combined with high costs and the cash-flows generated from previous years are rarely
enough to finance all the investments needed (Chorafas, 2005).
For companies to finance larger investments like those for new premises, machineries or
vehicles they can either issue new shares or turn to different banks or venture capitalists
(Bodie, Kane & Marcus, 2004). Large corporations often obtain credit in the public debt
markets, while small firms often have to rely on commercial banks (Berger & Udell,
1994).Capital structure, the subject of this thesis, is about the choice between the different
financial alternatives that a company faces or the combination of debt and equity
(McMenamin, 1999).

1.1 Background
The issue of capital structure, the relation between debt and equity, is constantly debated
and never the less current (e.g. Harris & Raviv, 1991; Myers, 1984; Sogrob-Mira, 2005).
Capital structure is a complex issue of financial research (Van der Wijst & Thurik, 1993). It
is important to bear in mind that there are two different ways to finance the assets of the
firm; through equity and debt. Furthermore there are several different kinds of equity and
debts, such as common stock, preferred stock and retained earnings (untaxed reserves) as
well as bank loans, bonds, accounts payable and line of credit (McMenamin, 1999; Ross,
Westerfield & Jaffe, 2005). The relation between debt and equity, often measured with the
debt proportion ratio, represents the capital structure of a firm (McMenamin, 1999).
Literature indicates that there is a complex array of factors that influences small and me-
dium sized enterprise (SME) owner-managers’ financing decisions (Romano, Tanewski &
Smyrnios, 2001). Numerous of authors have discussed the issue of capital structure; some
of them are more prominent than other. Most applauded might be Modigliani and Miller’s
propositions (1958) besides the so called pecking order theory, developed by Myers (1984).
The academic world has spent much effort in trying to generalize and come up with theo-
ries and models explaining and predicting the most appropriate capital structure (e.g.
Myers, 1984; Myers & Majluf, 1984; Modigliani & Miller, 1958). The real world however,
shows that there is no single theory or model applicable to all companies and their choice
of capital structure (Mathews, Vasudevan, Barton & Apana, 1994; Barton & Mathews,
1989). There are theories explaining the advantages for certain mixtures of debt (Modigliani
& Miller, 1958), theories explaining why some companies tend to avoid debts (Myers, 1984)
and some theories pinpointing that some companies pays little attention to rational profit
maximizing but rather to their strategic goals (Barton & Matthews, 1989).
Companies with lager proportions of equity can face downsides for some time without fac-
ing a risk of bankruptcy, since the company does not have to pay out dividends to share-
holders during such situations (Finnerty & Emery, 2001). However, debt financed compa-
nies must, regardless to their result, pay interest on their debts (Kamsvåg, 2001). This im-

1
 Introduction

plies that a downturn will be riskier for a company with proportionally much debt. On the
other hand, during an upturn, the company with proportionally much debt will be more
profitable than the company with proportionally much equity (Pike & Neal 1993, Wramsby
& Österlund, 2004). As explained further in section 3.1.1, debt can function as an amplifier
of the result. In good times debt financing will enlarge the profits but will also worsen a
poorer outcome leading to a greater loss for a company.
There are many other factors influencing the decision on capital structure, some companies
are not able to receive bank loans (Kamsvåg, 2001), some have enough retained earning to
undertake their desired investments without taking any loans (Andersson, Wahlberg & Öst-
lund, 2006), and some does not want to undertake any dept by principle (Andersson & Wil-
liamsson, 2001).
When we decided to write this thesis in the area of capital structure, the ability to receive a
bank loan was important. We believe the transporting sector was suitable since they have
vehicles and facilities that can serve as securities for a bank loan. Transport companies as
well as manufacturing companies, apart from pure service companies, have fixed assets that
can serve as securities for bank loan, they can more easily receive bank loans compared to
service companies (McMenamin, 1999; Lumsden, 1995). We chose to focus on SMEs since
Småland in general and Gnosjö in particular are known all over the country for their entre-
preneurial spirit and for being a Mecca of SMEs (Wigren, 2003).
Another aspect of the choice of sector is that there exist many transporting companies in
the Jönköping region. 80 % of Sweden’s population lives within a 350 km radius from
Jönköping (Landstinget i Jönköping Län, 2007). The capital of Denmark, Copenhagen, also
lies within this radius. Furthermore Norway’s capital, Oslo is only 420 km away. This im-
plies that a huge proportion of the Scandinavian population can be reached and delivered
to easily. Jönköping is located along to the E4 highway, which makes it easy to reach
Stockholm and Malmö. Jönköping region is thus suitable for companies engaged in road
freight transportation. Furthermore, there is a growing demand for transport services as in-
ternational trade increases (Bolis & Maggi, 2003). The demands for road transports have
increased by more than 50 % through the last 30 years (Statistiska Centralbyrån, 2006).

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 Introduction

1.2 Problem
How to finance and structure the capital of a company is a problematic and important
question. Without capital the firm would be unable to run, grow and expand their business
(Pike & Neale, 1993). In this thesis three financing alternatives are mainly be discussed; re-
tained earnings, loans from credit institutions and capital from shareholders, since they are
the most common ones in combination with financial incentives and grants from the gov-
ernment to finance a company according to Pike & Neale (1993). The road freight industry
faces several options to finance vehicles and premises. We have described and analyzed the
capital structure decision making in firms operating in the Jönköping region within the road
freight industry. We have described and analysed whether or to what extent the theories are
applicable on these companies’ decision making process of capital structure.
There are theories discussing an optimal capital structure (e.g. Modigliani & Miller, 1958).
However, the capital structure decision seems to be influenced by more factors than only
pure financial. Myers (1984) introduced the pecking order theory which states that firms
prefer internal finance, i.e. using previous years’ profits, hereafter bank loans and last, to is-
sue new shares. However, in reality, companies might not always finance its assets in the
way that they would have preferred instead they sometimes realize the need of debt due to
strategic questions like growth. If a company chooses to finance a high percentage of their
capital by debt they will face a higher risk of bankruptcy, this risk of bankruptcy is primary
affecting small firms (Carter & Van Auken, 2006). How much risk owner/managers believe
a company can bear is a strategic question, since risk propensity is a strategically related di-
lemma (Barton & Matthews, 1989).
We wanted to test if the managers reason about capital structure in financial terms with aim
for certain debt proportions; if companies reason about debt as a cheaper alternative to-
wards equity or if they neglect those academic concepts and simply let their personal values
and beliefs affect the capital structure decision. We also wanted to test if Myers’ (1984) the-
ory that claims that firms prefer to finance their businesses by internally generated funds is
valid, and what factors affect this decision of internal financing.
We believe capital structure to be a financial complex issue. Copious of research have been
done, but yet there is no magic combination of equity and debt for companies to apply
(Modiglinai & Miller 1958; Harris & Raviv, 1991 among others). This thesis makes no ef-
fort in trying to solve this issue, but instead trying to shed some light on the capital struc-
ture decision issue within a specific industry in order to find out how executives reason
about the area under discussion.
The problem discussed lead to the formulation of the following research questions;

• What financial sources do the interviewed companies prefer and why?

• How is management’s risk-taking propensity affecting the capital structure deci-

sion?

• Is capital structure decision a strategic and/or a financial issue?

• What factors influence the capital structure decision?

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 Introduction

1.3 Purpose
The purpose of this thesis is to describe and analyze the decision of capital structure of
SMEs within the road freight industry in the Jönköping region.
Emphasise is put on the different aspects that influence the capital structure decision and
to what extent this is a strategic issue coloured by personal believes.

1.4 Definitions
This section explains some frequently used key terms in order to facilitate the reading proc-
ess.
Capital structure is defined as the relation between debt and equity that is used to finance
a firm’s assets (Moyer, McGuigan & Kretlow, 2001; McMenamin, 1999).
The optimal capital structure “is the mix of debt, preferred stock, and common equity
that minimizes the weighted cost to the firm of its employed capital, the capital structure
where the capital cost is minimized and the total value of the firm’s securities are maxi-
mized” (Moyer et al., 2001 p. 452).
SME is an abbreviation for small and medium sized enterprises. We used the term SME in
this thesis according to the European Commissions definition from 1996 (Nutek, 2005):
“The category of micro, small and medium-sized enterprises is made up of enterprises which employ fewer
than 250 persons and which have an annual turnover not exceeding 50 million Euros, and/or an annual
balance sheet total not exceeding 43 million Euros”.
Family business has no general definition but we have adhered the definition presented
by Gallo and Sveen (1991) cited in Mustakallio (2002, p. 27):
“A business where a single family owns the majority of stock and has total control. Family members also
form part of the management and make the most important decisions concerning the business”.

4
 Method

2 Method
In the following chapter the chosen method is discussed. We have described how the work proceeded in order
to fulfil the purpose, the research methods used are presented and the decisions made throughout the study
are explained.

As argued by Daymon and Holloway (2002) finding an interesting and feasible topic is not
always a straightforward and rational process because good ideas consist of a mixture of
theory, experience and prior research. Since it is a large project to write a bachelor thesis,
we invested time to come up with a subject that interested the three of us. Capital structure
is an interesting subject within the field of finance. Past project titles presented in section
3.6, served as a source of inspiration for us during the early stages of this thesis.
We have also used what Saunders, Lewis and Thornhill (2003) refer to as a funnel approach
meaning that we started on a general level and then we have narrowed it down to finally
end up with our specific objective. That is, we started by deciding that capital structure
should be the theme of our work and then we step by step refined it to make it more fo-
cused and suitable for a bachelor thesis.

2.1 Theory testing

A deductive approach is according to Saunders et al. (2003) when theory is tested on real-
ity. We used a deductive approach since we developed a theoretical framework as the initial
stage of this thesis. The theories presented in the theoretical framework are later in the
analysis tested to what extent they can relate to our findings. An inductive approach, on the
other hand, is when one first gathers data and afterwards tries to develop a theory out of it
(Saunders et al., 2003). We started to study the subject of capital structure and built a
framework of what we believe was the most important and representative theories pre-
sented in academic literature. Emphasize was put on capital structure models and theories
that best suits the special features of SMEs in particular but theories concerning special
traits for family businesses are also applied. Naturally, this selection process of determining
which researcher’s ideas to include in our theoretical framework and which to exclude, is
biased by our own interests and tastes. We might have reached other conclusions if we had
used other theories.
In order to get some influences and to get some inspiration about what theories that could
be useful in our study, we started the process of building a theoretical framework by read-
ing other thesises about capital structure. Further, we tried to scan the field of research
done within the same topic by reading journals, specialist literature and text books within
finance. After we had developed a framework of relevant theories, we conducted interviews
in order to gather empirical data. The questions were inspired by the theories and formu-
lated in a way that the answers would include the information presented in the theories.
Hence, our theory was developed to easier understand different phenomena on how capital
structure is formed by the different businesses and what determines the decision making
process.
Since our frame of reference was developed before we conducted the interviews the results
from the interviews were coloured by this. We might have had a broader spectrum if we
had chosen to perform the interviews before writing the theoretical part of the thesis.
However, this is in line with our choice of a deductive approach were we narrowed our
purpose down to a specific issue. By doing this we were able to make efficient interviews

5
 Method

because we knew exactly what information we were interested in. Also, it would have been
harder for us to get companies to participate in our study if the interviews would have
lasted for more than an hour. In addition, an increased amount of time spent on each in-
terview (conducting, processing and analyzing) would reduce the number of possible ob-
servations which might have weakened our conclusion.

2.2 Qualitative and quantitative data

The empirical part of this thesis is mainly based upon qualitative data collected from inter-
views. According to Robson (2002), qualitative data are characterized by its richness and
fullness related to the opportunity to explore a subject in its true sense. In distinction from
quantitative data where the answers take form as a numerical value (Saunders et al., 2003).
Quantitative data is somewhat thin whereas qualitative is more thick or thorough (Dey,
1993; Robson, 2002). The qualitative data, collected from our interviews, concerns the
companies’ opinions and emotions rather than concrete numerical values. Moreover, quali-
tative studies are better to carry out by the use of interviews rather than questionnaires,
since they are more flexible (Ghauri & Grønhaug, 2005).
The main reason for our choice of a qualitative method is, first of all, the fact that capital
structure is a complex issue and not a scientific topic in the sense that there exists no right
or wrong (Mathews et al., 1994; Barton & Mathews, 1989; Van der Wijst & Thurik, 1993).
Second, we did not just want to know how companies choose to structure their capital but
instead the decisions underlying these choices. We do not believe that this could be fully
covered by making a quantitative research depicting the results in graphs or other quantita-
tive measures. The information revealed during the interviews would also have been diffi-
cult to access through secondary information since we needed information about the man-
gers/owners opinions and personal thoughts behind their decision of capital structure. The
annual reports made it easier for us to get a whole picture of the organizations without hav-
ing to ask questions during the interviews concerning information that is public in their an-
nual reports. The quantitative data collected by deriving the information from annual re-
ports was analyzed by the use of diagrams as suggested by Dey (1993).
If one uses a questionnaire it is easy to compare the results since the answers already are
divided into different categories. Data collected from open-question interviews, as in our
case, is not standardized in the same manner. Therefore the data first needs to be divided
into categories and then analyzed by conceptualization (Saunders et al., 2003). We thus
chose to present our empirical findings on the different companies in a similar way. This
facilitates the reading process and smoothes the progress of the analysis of our findings.

2.3 Primary and secondary data

The interviews conducted for this research is our primary data and it was collected for our
specific research only. The data collected is unique for our study. Interviews are good tools
for collecting primary data since one can go into depth in every situation and every case can
be adapted to the specific situation (Delmar & Davidsson, 1993).
The data needed for this study could not be found in any secondary data since it is based
upon the thoughts, beliefs and values of the interviewees. Secondary data is data that is al-
ready collected for another purpose (Saunders et al., 2003).

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 Method

As mentioned in the previous section, we have also used secondary data derived from the
companies’ annual reports. Here, much information is available about the company such
as, turnover, number of employees and constellation of board members etcetera. We used
this data to make sure that our interview findings are valid as further discussed in sec-
tion 2.5. We also used the annual reports to compare with industry index in order to have
figures to relate this information to.
One should bear in mind that respondents are not fully objective and social desirability
might make the persons interviewed trying to put them self in the best manner possible.
Therefore, it is important to consider what remains unsaid during the interview. It is natu-
ral to highlight the positive aspects in an interview and not actively discuss drawbacks or
negative aspects of the business (Delmar & Davidsson, 1993). This dilemma is most real-
ized in our interview questions about drawbacks with existing capital structure and the
companies’ relationships with bank. It is therefore important for us to not interpret the
empirical findings literary. The question about drawbacks with existing capital structure
provides us with a picture of how aware the companies’ are about alternative solutions to
current decisions of capital structure rather than if there exists any downsides at all. None
of the companies interviewed argued that they have bad relations to the bank. The industry
index of the road freight industry gives us therefore valuable input to compare our findings
with. Delmar and Davidsson (1993) stress the importance of comparing the results given
from interviews to secondary data like annual reports.
Cross referencing the primary data with secondary data validates the answers given by the
interviewees. A problem connected to this is the time span; sometimes it is more than a
year between the end of the fiscal year in the annual reports and the date of the interviews.
All interviews were conducted in April 2007 when the annual reports for 2006 were not
available. We have used the latest annual report available from Bolagsverket (a public
Swedish organization where all firms have to be registered). Furthermore, we have cross
referenced some of the information collected for this study with Hans Guldstrand who
works as a credit officer in the Jönköping region at SEB, one of Sweden’s largest banks.
We contacted him about his view upon the road freight sector from the perspective of a
debt issuer as well as some general comments about the road freight industry in the
Jönköping region.

2.3.1 Structured interviews

This study is based upon structured or standardized face-to-face interviews where we have
asked the same questions to all interviewees (Arbnor & Bjerke, 1994) in order to facilitate
the comparison and analysis of the findings (Sekaran, 2000). This was mainly due to the
fact that similar information was received. Structured interviews should be used when it is
known on forehand what information that is needed (Sekaran, 2000). The interviews were
conducted in Swedish and than translated to English. The reason behind this was that the
interviewees did not speak English fluent enough.
According to Svenning (2003) personal contact with the interviewees gives the researcher a
good reference to the answers which is why we decided to undertake all of our interviews
face-to-face. As mentioned earlier, all companies in this study are situated in the surround-
ings of Jönköping which made it easy for us to visit the managers in person. We believe
that this made the interviews more thorough and reliable. Collecting primary data might be
expensive and time consuming (Saunders et al., 2003). Since we conducted all of our inter-
views in the Jönköping region no significant cost are associated with the collection of our

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 Method

primary data. Personal interviews offer rich data that is given on impulse by the respon-
dents (Sekaran, 2000). In a face-to-face interview the researcher can clarify doubts and re-
phrase questions if needed in order to make sure that the respondent clearly understands
what information that is wanted (Sekaran, 2000). Sekaran (2000) adds that the interviewer
can pick up nonverbal signals e.g. from body language. We hope that we signalled that we
were interested in their businesses when we spent time to visit them all and that this pro-
vided the interviewed persons with a more positive picture of us and our study. We believe
this enhanced their willingness to participate in our study.
Since our purpose of the interviews was to discover what influences the companies’ deci-
sion of capital structure which is coloured by personal beliefs and values. We think that we
were able to better capture these personal opinions in a face-to-face interview compared to
over the telephone. In addition, we believe that it increased our trustworthiness and that
the companies felt more secure that we should use the information in a proper manner.
Further on, the time spent on booking the interviews, transports, performing the interviews
and the processing of the information is regarded to be time well spent considering the
outcomes. If we instead would have chosen to conduct the interviews via telephone a
broader audience could have been reached. When we had conducted six interviews we re-
garded them to be enough to draw proper and valid conclusions; more interviews would
most probably have strengthen our ability to generalize but weaken our analysis of each
company, since we had a restricted amount of time to undertake this study.

2.3.2 Interview questions

Except from one ranking question, which is to be regarded as a closed question, we used
open questions during our interviews. Open questions allow the respondents to answer in
any way they want. Closed questions indicate that the respondents are provided with sev-
eral alternatives that they are asked to choose among (Arbnor & Bjerke, 1994). Due to the
nature of our purpose, finding the companies underlying decisions of their capital struc-
ture, it would be difficult to cover all possible aspects in closed questions. Open questions
seemed in our opinion to be a more suitable choice since it allows the respondents to
elaborate freely on a certain question or field of interest. The questions can be found in
Appendices 1 and 2.

2.4 Process of work

When we had decided that capital structure should be the theme of this thesis, several pos-
sibilities arose in the choice of business sector, size as well as geographical location, what
companies to study and who at the company to interview. Harris and Raviv (1991) noted
that firms within a particular industry have a similar capital structure compared to those in
different industries. Therefore we chose to focus on one particular industry, the road
freight industry, to compare and analyze the differences between companies in that specific
industry instead of studying the issue of capital structure in different companies in different
industries. The road freight industry was chosen because there is a growing demand for its
services as consumption and the trade within EU increases (Bolis & Maggi, 2003) and also
because most companies within this industry often have assets that can be used as a secu-
rity for the bank loan e.g. premises and trucks.
There are a great number of companies within the road freight industry. The reasons for
focusing on SMEs were mainly based upon two arguments. First, SMEs stand for the larg-
est proportion of firms in almost every developed country (Sogrob-Mira, 2005). According

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 Method

to the European Commission (2000) (in Sogrob-Mira, 2005), SMEs stand for 66 % of em-
ployment and 65 % total turnover among all companies in the European Union (EU).
They create entrepreneurial spirit and innovation at the same time as they are an important
source of jobs for the work force. These factors make the existence of SMEs a crucial fac-
tor for an economy to succeed (Sogrob-Mira, 2005). Second, we believed that large public
companies to be complex, serving many different stakeholders, but also that it would be
difficult both to get and further to analyze the data from such companies. On the other
hand we believed that very small companies, sometimes referred to as micro companies,
seldom have enough capital employed in order to make capital structure an important is-
sue. Further on, to get as good and relevant answers from the interviews as possible we
found it important to interview the chief executive officer (CEO). This would have been
hard to accomplish if large public companies were chosen. Most certainly the CEOs in
such companies would not have spend their time on our study. Instead being referred to
the Chief Information Officer or the person responsible for the contact with students,
would not give an exact picture of the firms underlying reasons when deciding upon the
capital structure.

2.5 Selected companies

Since we made the decision to do our interviews in person it was of importance that the
companies were located in an accessible distance. Eniro’s yellow pages gave us 529 matches
(Eniro, 2007) when we searched for businesses within the transport industry in Jönköping.
Many of these matches were rejected, mainly because of their size and location. Many
companies were sorted out since they do not belong in the road freight industry. We fo-
cused on SMEs but did not want to include very small companies in our research and
therefore companies with fewer than 10 employees and/or a turnover not higher than SEK
10 million (M) were excluded. We excluded companies that do not have their head-quarter
in the Jönköping area and contacted the remaining ten companies/company groups and
asked whether they would be interested in being part of our study. Only one company de-
clined us, however the CEO said that he would like to help but just could not find the time
for it. We decided not to interview the three remaining since we considered the already
conducted ones to be enough. We chose to conduct six interviews because we believe it to
be many enough to draw conclusions, but chose not to interview more due to limited
amount of time and because we believed that we could perform a deeper analysis with
fewer respondents.
We requested to meet the CEO. In most cases, the person most suitable as our interviewee
turned out to be both owner and manager. How this affected our results is discussed in the
analysis.

2.5.1 Interview information

We conducted our company interviews between April 11th and 24th at the companies’ of-
fices. We recorded all interviews in addition to at least one of us taking notes. The inter-
views lasted approximately 30 to 40 minutes. We were three interviewers at two occasions
and two persons at the other four occasions. We have interviewed the CEO, chief financial
officer (CFO) and/or owner of the different companies depending on whom they believed
were most suitable to answer our questions. All persons interviewed were able to answer
our questions to our full satisfaction and we felt that they had a concrete and genuine
awareness of how decisions are made, concerning the issue of capital structure.

9
 Method

Our seventh interview, with the credit officer, was conducted by two of us on the May 15th
and lasted for about 30 minutes at SEBs office in Jönköping. We were not permitted to re-
cord the interview due to banking secrecy, but we were permitted to take notes.

Table 2.1 - The interviewees

Company Person Position
Claessons Transport Göte Claesson Owner and CEO
June Express Sven Lundahl Owner and manager
Expresstransport Magnus Bäverholt Owner and manager
Hit&Dit Jörgen Svensson CFO
Alfa Christer Bosmyr Owner and CEO
Transflex Michael Grennard Owner and CEO
SEB Hans Guldstrand Credit officer

2.6 Reliability
Saunders et al. (2003) discuss that reliability can roughly be divided into three different sub
categories; (a) will the measures yield the same results on other occasions? (b) will similar
observations show the same results? and (c) is it clear how sense was made from raw data?
It is most likely that we would have collected the same information if we performed the in-
terviews once again since no single answer indicates any reference to a specific time period,
all companies have had similar look upon capital structure throughout the history. Of
course the companies have had different capital structures during different phases but the
thought, values and beliefs behind the decision of capital structure have remained constant.
If we had chosen other companies in the same industry in the same region we believe we
would have found similar results, since we have looked upon some very different compa-
nies in terms of turnover and number of employees, and can therefore assume that also
others would have reasoned about capital structure in a similar manner. This question af-
fects the ability to generalize our study and is discussed further under the section 2.8.
We chose to present our interviews separately, one company after the other, to make sure
that we did not mix up the information retrieved and to make it easier for the reader to un-
derstand what the different companies’ capital structure decision were based upon. We
have also chosen to present the companies’ debt and equity from the annual reports in
graphs to clearly portrait their capital structure. Further, we have chosen to first present the
companies in the empirical findings where the findings from the interviews are presented
and then an analytical part are presented where we have interpreted the findings with the
help of our theoretical framework. By keeping these two chapters apart we believe that it is
easier for the reader to understand how logic was made from raw data.

10
 Method

2.7 Validity
It is important to make sure that you measure what is intended to measure and that the re-
sults really portrait what they were intended to in order not to avoid that the study comes
out biased (Saunders et al., 2003). This is why researchers should ask themselves what this
test is measuring? (Arbnor & Bjerke, 1994). It is important to distinguish between internal
and external validity. External validity is about the whole project; its theories and empirical
findings as well as the ability to generalize in a broader perspective (Svenning, 2003).
Information retrieved from our six interviews of road freight companies in the Jönköping
region makes no effort in trying to explain the capital structure of companies in general. As
stated by Harris and Raviv (1991) firms within a particular industry have a similar capital
structure compared to those in different industries, these findings might be applicable on
SMEs in the road freight industry but not on companies in general. However, our aim of
this research was not to draw general applicable conclusions. As argued before, we believe
that by making a qualitative research we enriched our answers and made them more valid
since the values and beliefs would have been hard to depict in any statistical diagrams.
The internal validity is about if questions are asked to the right persons and to choose a
measurement tool that is most relevant for the project’s different parts (Svenning, 2003).
The internal validity, in our case, is about whether the interviewed persons were the most
suitable to question and whether the annual reports are the most appropriate secondary
data to use, which we believe they are.

2.8 Method criticism

Since we had a limited time available for making the interviews we were forced to reduce
the number of observations which also is the number one delimitation of this study. A
small number of observations lead to difficulties to generalize (McDaniels & Gates, 2005).
The trends identified for the companies we investigated are probably not valid for the road
freight industry as a whole and definitely not for companies in general. If we would have
wanted to make our findings more suitable for generalizing we would have chose to per-
form a quantitative study instead. With a quantitative measure we would have used a larger
sample and statistically been able to prove that our findings are normally distributed.
The companies participating in our study are all located in the Jönköping region which also
makes it hard to generalize. There might be unknown reasons for decisions that only are
valid for this region due to e.g. business climate. If we instead would have chosen to con-
duct the interviews via telephone, a broader audience could have been reached, but non
verbal information could not been read (Sekaran, 2000). In order to make our findings
more generalizeble we could have chosen to perform a quantitative study instead. With a
quantitative measure we would have used a larger and broader sample and statistically been
able to prove that our findings were normally distributed. However, we believe that by do-
ing qualitative interviews face-to-face we got better and more in-depth answers of the true
underlying aspects influencing the capital structure decision, compared to if we had used a
quantitative questionnaire.
Delimitations can be seen in the choice of persons to interview. For all companies except
one we got to meet a person who owned or partially owned the business in question. It is
possible that their answers to our questions were biased since people probably are less
likely to criticize their lifetime achievement.

11
 Method

Only one firm declined to participate in the study and the reason for that was the heavy
work load they faced during that specific period of time but they commented that they
happily would have helped us if they had more time. Therefore we believe that there are no
underlying factors for non-responses for us to consider.

2.9 Previous capital structure thesises

Andersson and Williamsson (2001) concluded in their study on six family businesses that
the choice of capital structure depends on many factors; not only pure financial decision
but tradition, municipality, family goals etc. They chose to put their focus on family busi-
nesses only. Our focus is on the transporting sector since Harris and Raviv (1991) stated
that firms within the same industry seem to have a similar capital structure. We believe it to
be easier to compare and analyze the different companies because they operate in the same
industry instead of because they are all run as family firms.
Another master thesis were we got some useful insight into the capital structure decision
making field is Alvemyr and Arenblom (2003) who compared differences in capital struc-
ture in different sectors. They reached to the conclusion that what is an optimal capital
structure varies from firm to firm and that optimal seems to mean two different things in
theory compared to reality. This is why we chose to focus on a specific industry.
Finally, Wahlberg and Ekeroth (2006) discusses in their thesis if Swedish companies acts in
accordance to the optimal capital structure theory and/or the pecking order theory. They
came to the conclusion that none of them is followed and that Swedish companies prefer
internal financing followed by equity and as a last choice debt.
Apart from the papers presented above, this thesis will focus on the decision behind the
choice of capital structure and what aspects that influences the decision. The theories high-
lighted in this thesis are mainly dealing with strategic issues and risk awareness. Wahlberg
and Ekeroth (2006) and Alvemyr and Arenblom (2003) emphasized more pure financial
theories like the Modigliani and Miller propositions, the pecking order theory, agency cost
and asymmetric information and signalling models.

12
 Capital Structure Theories

3 Capital Structure Theories

This chapter starts by introducing some general theories of capital structure and then theories of relevant
theories for SMEs capital structure decisions are presented.

3.1 Foundation of capital structure decision theories

According to the three of us, it would be unwise and remarkable not to start this theoretical
framework with introducing the most cited publication as far as we are concerned; Modi-
gliani and Miller’s (1958) theory of optimal capital structure and theories on information
asymmetries. Therefore, before presenting the most important theories in this study, the
optimal capital structure is presented. It serve as a base presenting how the capital structure
ought to be according to pure financial issues in contrast to later presented theories explain-
ing how, in reality, the capital is structured in most SMEs.

3.1.1 M&M theorem

The original ideas presented by Modigliani and Miller (1958) are very theoretical and as-
sumes conditions that do not fit with the real world e.g. all firms have a constant cash-flow,
there exist no taxes and all investors and businesses can borrow and invest to the same
risk-free rate (Wramsby & Österlund, 2004). However, Modigliani and Miller’s famous
theorem (M&M theorem) has made a great contribution to the field of finance as several
authors have further developed their original theory. This has resulted in a formula show-
ing why the proportion of debt financing is positively correlated with the return on equity
(Pike & Neale, 1993). Today the formula is better known as the leveraging effect (Johans-
son, Johansson, Marton & Pautsch, 2004).
A firm that chooses to issue some debt e.g. take a bank loan, will increase its return on eq-
uity since the cost of lending money from a bank is cheaper than “lending” money from
the shareholders (Pike & Neale, 1993). It is cheaper due to the fact that long-term debt
normally has lower administrative/issuing costs, debt interests are normally tax deductible
and the pre-tax interest rate on debt is invariably lower than the required return of share-
holders since debt usually demands assets as securities (Pike & Neale, 1993). This implies
that an increasing proportion of debt financing, to a lower interest rate than the required
return of shareholders, will increase the return on equity and thereby the wealth of the
shareholders.
WACC
An alternative way of looking at this phe- Theoretical
Ideal Mix
nomenon is to consider the weighted average
cost of capital (WACC). In connection to the
modified version of M&M proposition with
corporate tax, one can derive that an in-
creased proportion of debt financing, to a
lower interest rate than the required return of
shareholders, will either reduce the cost of Debt-to-Equity
Ratio
capital (see Figure 3.1) or increase the return
100% 100%
to shareholders (Pike & Neal, 1993). In the Equity Debt
latter situation, the cost of capital remains
constant as the benefits of using cheaper Figure 3.1 - WACC vs. D/E (Marks, Robbins, Fer-
debt is exactly balanced by the increase in the nandez & Funkhouser, 2005 p. 23)

13
 Capital Structure Theories

cost of equity. This leaves a net tax advantage with the conclusion that firms should use as
much debt as possible (Chittendale, Hall & Hutchinson, 1996). However, the debt interest
rate is only lower than the return on equity to a certain point since creditors demand pre-
miums for the risk they take when lending money (Marks et al., 2005).

3.1.2 Information asymmetry

Information asymmetries are frequently debated in capital structure literature (e.g. Myers,
1984; Myers & Majulf, 1984; Hutchinson, 1995). Information asymmetry means that the
people inside the organization possess more information than what investors do. This can
lead to the firm’s equity being incorrectly priced by the market and thus a greater risk for
the business owners (Myers & Majulf, 1984). The asymmetric information problem is
greater between small firms and the banks than for large companies and their external pro-
viders of capital. Lenders will be unwilling to lend long-term loans to owner-managed
businesses due to the risk of asset substitution and small businesses therefore have to rely
on short-term loans instead (Chittendale et al., 1996). According to Hutchinson (1995) in-
formation asymmetry are present within owner-managed firms because family and friends
will find difficulties in trying to understand the problems with the investments.

3.2 Pecking order theory

The pecking order theory is about what firm’s management prefer; a pecking order of alterna-
tive sources of finance that firm faces (Myers, 1984; Wramsby & Österlund, 2004): First,
firms chose internal finance, i.e. using profits from previous years. Second, if there is no in-
ternal finance available, will firms chose to lend money from credit institutions such as
banks. Third, only as a last option will firms issue new shares. Basically, the pecking order
theory says that management favours internal financing to external financing (Wramsby &
Österlund, 2004).
Myers (1984) discusses in his article the capital structure puzzle why this pecking order is used
by numerous firms, because it clearly goes against shareholder’s interests in returns. In a
managerial view it has been stated that “professional managers avoid relying on external finance be-
cause it would subject them to the discipline of the capital market” (Myers, 1984, p. 582). Another
important issue is transaction costs; internal financing is cheaper than external funding
since the later is associated with great costs (Wramsby & Österlund, 2004).
The pecking order theory tries to explain why most profitable firms use internal financing;
the easy reason for this is that they do not need to make use of external funding. The other
extreme, less profitable businesses do not possess enough internal capital and have to seek
for external funding (Myers, 1984). Hutchinson (1995) points out that profit retention has
an opportunity cost. The more business owners are willing to risk, the higher the possible
profits.
The pecking order approach is relevant for small businesses since costs associated with ex-
ternal financing are higher for small firms than for large businesses (Chittendale et al.,
1996). Sogrob-Mira (2005) argues that the pecking order theory could easily be applied on
SMEs since managers usually are at the same time shareholders and they do not want to
lose control of their businesses. SMEs will prefer internal financing to external resources
since it will allow them to continue to be independent. If SMEs need external funds, they
will choose an alternative that do not diminish the managers/owners operability. Further,
Sogrob-Mira (2005) concludes in his article How SME uniqueness affects capital structure that

14
 Capital Structure Theories

companies use the pecking order theory are successful, since more profitable SMEs tend to
use less debt when financing their businesses. Chittenden et al. (1996) argue that one of the
reasons why small firms avoid the use of external funding is that it would lead to less con-
trol by the present owner/managers.

3.3 SMEs strategic capital structure decision

It is argued that capital structure is not just a financial question but also a strategically issue
that the company faces. Barton and Matthews (1989) presented in their article ”Small firm
financing: implications from a strategic management perspective” a concept suggesting that corporate
strategy plays an important role that might be more influential than a traditional finance
perspective in explaining small firms financing decisions. Capital structure is not just a fi-
nancial issue of trying to find the optimal level of debts and taxes (Modigliani & Miller,
1958) or a question that firms prefer internal financing due to shareholder’s interest and
transaction costs (Myers, 1984). Barton and Matthew (1989) instead argue that the most
important factors affecting the capital structure is influenced by the company’s vision, risk
aversion and internal constraints.
Barton and Matthews (1989) present five different propositions in their article on what af-
fects SMEs financing decisions (pp. 3-5);

“Top management’s risk-taking propensity affects the firm’s capital structure”. The amount of debt
that top managers feel is manageable affects the overall debt ratio of the firm since the
owners most often have to personally guarantee the loan in order to acquire one (Barton &
Matthews, 1989). McMenamin (1999) argue that owners attitude towards risk seem to in-
fluence the choice of capital structure. As debt increases the risk inflate, hence, a risk-
averse organization will probably use debt to a less extent than a risk-willing organization.
This proposal about top management’s risk awareness affecting capital structure is sup-
ported by Levin and Travis (1987) (cited in Barton & Matthews, 1989) who claim that
SMEs’ equity level plays impact of their owners’ attitudes towards risk. In case SMEs need
external financing they will prefer short-term debt before long-term debt since the latter
reduce management’s operability and short-term debt do not include restrictive covenants
(Sogrob-Mira, 2005).
“Top management’s goals for the firms will affect the firm’s capital structure”. Not all managers strive
for profit maximizing; growth can sometimes be considered more important (Barton &
Matthews, 1989). This idea is strengthened by Levin and Travis (1987) (in Barton &
Mathews, 1989) who argue that SMEs not follow the same patterns and policies as larger
companies do. In fact, SMEs choose debt on personal and managerial preference than
what larger firms are able to do. This is supported by Romano et al. (2001) who argue that
capital structure processes should be analyzed by the impact of owner/manager’s personal
reference and values of the firms’ characteristics.

“Top management would prefer to finance firm needs from internally generated funds rather than from ex-
ternal creditors or even new stockholder”. Top mangers have a preference to remain as free as
possible and do not want to become restricted by debt agreements (Barton & Matthews,
1989). This idea goes in line with the pecking order theory (Myers, 1984). Hutchinson
(1995) argues that this could lead to an under-investment problem where high-quality, low-
risk project are rejected to be undertaken due to lack of equity and the unwillingness to ex-
ternal financing.

15
 Capital Structure Theories

“The risk propensity of top management and financial characteristics of the firm affect the amount of debt
lenders are willing to offer and on what terms”. Credit institution’s willingness to lend money to
different organizations is risky from their point of view; they always estimate how well they
consider the organization’s ability to pay back when providing a bank loan (McMenamin,
1999).

“Financial characteristics moderate the ability of top management to select a capital structure for the firm”.
The financial risk and flexibility of a firm tend to affect what the management’s willingness
change their capital structure (Barton & Matthews, 1989). The main incentive to increase
the level of debt in a firm’s capital structure is when the interest costs are tax deductible
(Hutchinson, 1995).
Matthews et al. (1994) argue similar to Barton and Matthews (1989) that capital structure is
an issue of strategic choices and beyond what they refer to as the finance paradigm. Infor-
mation asymmetry theories have contributed to our understanding of the capital structure
issue but they do not address the details of analyzing the managerial choice of the capital
structure decision. In order to understand privately held businesses’ capital structure we
need to apply a strategic perspective. Business leaders in small privately held business are
less likely to be challenged by others and their personal characteristics will play a more
dominant role in the decision making phases (Matthews et al., 1994).

External variables
Market conditions
Financial decisions
Need for control Organizational form

Risk propensity

Beliefs about debt Attitudes towards Capital structure

Experience debt decision

Social norms

Personal net
worth

Figure 3.2 - Capital structure decision in privately held firms using strategic choice and theory of reasoned ac-
tion (Matthews et al., 1994, p. 358)

Beliefs about debt differs from attitudes towards debt in the way that a manager can dislike debt
as a form of financing, but still possess the knowledge that debt might sometimes be
needed as a part of the companies’ capital structure (Matthews et al., 1994).

16
 Capital Structure Theories

3.4 Risk
Barton and Matthews (1989) argue that the amount of risk a company could bear is one of
the greatest explanations to how capital is structured. In general, when discussing risk there
are two different forms; operational risk and financial risk. Operational risk is the uncer-
tainty concerning decisions: on the market, prices, personal, organisation, business cycle
and similar. Financial risk is the risk a company faces when choosing the amount of debt
and equity; the capital structure of the firm (Delmar & Davidsson, 1993).
Cressy and Olofsson (1996) made a quantitative study were they measured financial condi-
tions for SMEs in Sweden. They could see a tendency showing that larger firms are more
diversified and exhibit a lower degree of financial risk. The debt proportion ratio tends to
diminish with business size. Hence, financial risk declines with size.
Delmar and Davidsson (1993) argue that there are four major factors affecting what level
of risk a business owner is willing to take:
i) Competence
The term refers to general knowledge within the field of business administration and the
ability to understand the importance of analysing information about the firms’ economical
status. How aware are they about the risk they are taking?
ii) Social skills
Social skills are often the same as a good contact net. Contacts gain access to external in-
formation and competence which can make the decisions easier.
iii) Motivation
The willingness to expand the business and need for achievement affects the amount of
risk they are prepared to take.
iv) Self realization
Self realization about how well business owners realize how much risk they can bear and
that they sometimes need external advice.

3.5 Characteristics affecting capital structure

There are several other factors influencing companies’ choice of capital structure. Petersen
and Rajan (1994) argue that there are more relevant and suitable measures to use when ana-
lyzing the capital structure of an organization than those presented by Miller and Modi-
gliani (1958). Business size, age and cash flow is according to Petersen and Rajan (1994)
important factors.

• The larger the company is, normally the debts are too.

• The age of a company affects the capital structure. As the company matures debt
decreases. Young companies are more or less forced to finance through bank loans
while older have had possibilities to build capital from previous revenues.

17
 Capital Structure Theories

• A company with a solid cash flow has fewer problems to pay interest and to amor-
tize than a company with a volatile cash flow, due to these reasons they can handle
a larger amount of debts.
Myers and Majluf (1984) refer to the rational holding of financial slack (which they define
as cash, liquid assets and unused borrowing power) in order for the firms to be able to act
fast and not to have to issue stocks on short notice to pursue a valuable investment oppor-
tunity. It is usually superior to issue safe securities than risky ones. “Firms should go to bond
markets for external capital but raise equity be retention if possible, i.e. external financing using debt is bet-
ter than financing by equity” (Myers & Majulf, 1984, p. 219).
Hutchinson (1995) presented an idea why small firms may not choose to increase its debt
in capital in line with the capital structure that would maximize the value of the firm. He
suggested that small firms move towards a more conservative look upon debt; an equity-
ratio which decreases the effect from financial risk and, as a result, decreases the cost of
equity. Hutchinson (1995) explains the phenomenon of owner/managers aversion to new
equity capital to purely be due to the desire to remain independent and in total control over
the business.
Chaganti, DeCarolis & Deeds (1995) made a quantitative study of 14 different strategic fac-
tors which they believed affected the capital structure decision and concluded that the most
important variable is owner’s goal-satisfaction of economic needs.

3.5.1 Special characteristics of family businesses

Businesses run by families are dissimilar to non-family businesses in many aspects. The aim
for family businesses is stability compared to the non-family firms’ aim of maximizing fu-
ture stock price. The goal for the family businesses is to care for the assets and the reputa-
tion of the family distinguished from non-family businesses’ goals of meeting investors’
expectations. The most vital stakeholders for family business are employees and customers
(Ward, 2005). Family businesses account for a large proportion of all companies in Sweden,
the exact number of depends on how different researchers define the term family business
(Gandemo, 2000).
Romano et al. (2001) developed a model of what affects capital structure decision making
process in family business SMEs. Following text are explanations to the model presented in
“Capital structure decision making: a model for family business”:
Size – The M&M theorem implied that the size of a firm does not affect the capital struc-
ture of the same. Hutchinson (1995) claimed the opposite, that there is a link between firm
size and capital structure.
Industry – As discussed in the background of this thesis Harris and Raviv (1991) stated
that firms within the same industry are more alike than companies in different industries.
Romano et al. (2001) presents several observations confirming Harris and Raviv’s findings.
Age of the firm – Developing firms tend to rely on equity because of difficulties in getting
a bank loan, whereas mature businesses tend to raise debts since they are able to control as-
sets (Romano et al. 2001; Peterson & Rajan 1994). On the other hand, Hutchinson (1995)
argue the opposite; most owner-managed firms need to finance an expansion through bank
loans since they do not posses enough equity in the early stages of development.

18
 Capital Structure Theories

Family control – Entrepreneurs that

have a strong will to stay independent Size
tend to use retained profits and equity
and as long as it is possible not to in-
volve other participants. When Debt
Industry
owner/mangers is considered risk
averse and have a strong will to stay in
full control of their business, the owner Age of
“may actively place limits on the use and firm Family
growth of equity, not only in the small firm’s loans
early, but in its later phases” (Hutchinson,
1995 p. 238).
Family
control
Age of the CEO – Older entrepre- Capital &
neurs are less willing to involve outside retained
participants and use less debt than Age of earnings
younger entrepreneurs (Ward, 2004). CEO

Business planning – Banks lay em-

phasis on the importance of a written Planning Equity
business plan which they prove to be
positively related to debt (Harvey &
Evans, 1995 in Romano et al., 2001).
Objectives
Business objectives – Smaller firms
may use less long term-debt than large
Plans
companies but also more short-term Achieve
debt (Sogrob-Mira, 2005). Entrepre- growth
neurs who are stubborn about their
businesses are more likely to use inter-
nal financing rather than debt financing Figure 3.3 - Hypothesized model for family business fi-
(Chaganti et al., 1995). nance antecedents and outcomes (Romano et
al., 2001, p. 296, simplified version)
Plans to achieve growth – For many
business owners growth is not the purpose (Curran, 1986 in Romano et al., 2001), but
those who run their businesses with the aim of growing it are more likely to use a larger
percentage of debt financing (Van der Wijst & Thunik, 1993).
Family business owners typically reinvest most of their funds during the early stages of the
business life cycle. As the firms grow, so do the financial demands of the family owning the
businesses and that is why owners tend to use company profits rather than adding own
capital for further growth (Ward, 2004). According to Sonnenfeld and Spencer (1989) fam-
ily businesses have low debt proportions levels because in bad times, bank loans increases
the risk of bankruptcy. Further, this would hurt the family’s reputation and is therefore
avoided.

19
 Empirical Background

4 Empirical Background
This chapter introduces the road freight sector and some important background information that help the
reader better understand the empirical findings in the next chapter.

4.1 The transport sector

Transport has an important function in the economic activity; it contributes to a share of
the national output. Increased demand and growth in the transport industry follows the
economic growth in the economy as a whole (Quinet & Vickerman, 2004). The total econ-
omy and society depends heavily on efficient road transports, e.g. 44 % of the goods trans-
ported in the EU are moved by trucks (European Commission, 2007). The transport indus-
try accounted for 20 % of Sweden’s total industry production in 2002 which made it the
largest branch in the country looking at production value. The production value increased
34 % between 1998 and 2002 while employment within the sector only increased with 7 %
for the same period of time (Statistiska Centralbyrån, 2002).
The transport sector is similar to the service industry, but transport organizations in com-
parison to many pure service companies require large investments in vehicles in order to
build a well functioning business (Lumsden, 1995). The transport industry can be divided
into several subcategories: railways, pipelines, road passenger, road freight, inland water-
way, air, travel agencies and tour operators as well as other auxiliary activities (Quinet &
Vickerman, 2004). This thesis only focuses on road freight. In the European Union road
transport (freight and passenger) accounts for 1.6 % of the GDP and provide jobs to 4.5
million people (European Commission, 2007). In 1999, 30 631 transport enterprises were
registered in Sweden where road freight comprised just over 50 % (Quinet & Vickerman,
2004).

4.1.1 VAT regulations for light vehicles

According to existing Swedish laws it is not allowed to deduct the incoming value added
tax (VAT) when acquiring certain vehicles. This applies for example on small trucks weigh-
ing less than 3 500 kilograms. The only possibility for a full deduction of the VAT is when
the vehicle has an air duct between the driver's cabin and the cargo room. This means that
the spaces are two different entities, separated by two walls with air in between. The reason
behind this regulation is that the regulator wants to eliminate the possibility that tax-
deductible vehicles are used for private usage. Still, it is allowed to lease these vehicles and
deduct the VAT from the leasing cost (Riksdagen, 2006).

4.1.2 Credit rating

Credit rating refers to a company’s ability to pay its short-term and long-term debts. Finan-
cial institutions, e.g. Dun & Bradstreet, Standard & Poor’s and Moody’s, rate companies.
To get the highest rating companies must be well established and have notably better key
ratios than the industry average and generally have no payment remarks on the company or
its key persons (Dun&Bradstreet Sverige, 2007).

20
 Empirical Background

4.2 Special terms

The road freight industry will throughout this thesis refer to companies in business of
road transportation of items from an origin to a destination. This can be further divided
into several sub categories such as:
Express delivery is services where the customer has certain needs for quick transportation
of a single or a few packages. This can be within cities, between cities but also world wide.
UPS, DHL and Box Delivery are some main actors offering this service.
Haulage contractors are companies that have vehicles and drivers undertaking transport-
ing orders for forwarding agent companies. The Swedish term for this is “Åkeri” which of-
ten appears in the companies names.
Forwarding agents are administrative office services where some staff keep track on all
vehicles, routes and orders, ensuring that the transportation of the item(s) will run as
smoothly as possible. A feature for this category is that it normally hires express delivery
firms or haulage contractors to carry out the transportation. The Swedish term for this is
“Spedition”.

4.3 Calculations
The quantitative part of this study is based upon the latest annual reports available for the
different companies. This is the annual report for the fiscal year of 2005 for four of the
companies. Expresstransport and Hit&Dit however, have a fiscal year apart from the cal-
endar year and information from their fiscal year 2005/2006 is used.

4.3.1 The capital structure diagrams

According to Buckley, Ross, Westerfield and Jaffe (1998) the capital structure consists of
three parts; Short-Term Debt, Long-Term Debt and Equity. We have calculated the differ-
ent parts of the capital structure diagrams in chapter 5 by the formulas, used by UC AB,
Sweden’s largest and leading business and credit information agency. UC AB is owned by
the major Swedish banks (UC AB, 2007). Below is how the proportional weight of the
company’s total capital is calculated.

ShortTermD ebt
ShortTermD ebt % =
Debt + Equity Formula 4.1 - Short-term debt
Where short-term debt is current liabilities, expiring within one year, including: accounts
payables, current tax-liabilities as well as accrued expenses and deferred revenues (Finnerty
& Emery, 2001; UC AB, 2005).

LongTermDebt + 0.28 * Untaxed Re serves

LongTermDebt % =
Debt + Equity

Formula 4.2 - Long-term debt

Long-term debt is the intermediate and long-term liabilities, expiring after one year, such as
bank loans added with 28 % of the untaxed reserves which will be taxed once they are used
for investments (Finnerty & Emery, 2001; UC AB, 2005).

21
 Empirical Background

Equity + 0.72 * Untaxed Re serves

Equity % =
Debt + Equity Formula 4.3 - Equity
Equity is the total capital belonging to the owners such as; share capital and statutory re-
serve (restricted equity) as well as net profit added with 72 % of the untaxed reserves (non-
restricted equity) (Finnerty & Emery, 2001; UC AB, 2005).

4.3.2 Ratio formulas

In chapter 5 we will further compare data of the companies from their annual reports with
the industry median from 2005 (see Appendix 3). The different formulas UC AB uses
when calculating the raw data for the industry median are stated below.
The equity proportion is calculated according to the same formula as used in the capital
structure diagrams (see Formula 4.3)

EarningsBeforeTax + FinancialExpences
rA =
Asset Formula 4.4 - Return on asset
The return on asset (rA) indicates the companies’ ability to generate earnings from its capital
employed (Brealey, Myers & Marcus, 2004; UC AB, 2005).
FinancialExpences
rD =
Debt + 0,28 *Untaxed Re serves
Formula 4.5 - Debt interest rate
The debt interest rate (the subtracted part of the formula) is a ratio showing the average
borrowing cost the company faces. It does not indicate the interest rate the companies pay
for their bank loans/long-term debt but refers to the average interest rate of all debt, both
long-term and short-term debt (UC AB, 2005).

RiskBuffer = rA − rD
Formula 4.6 - Risk buffer
This ratio shows the amount of risk the companies take. In other words, how much of the
generated earnings that is left after paying the average interest rate in debts. (UC AB, 2005).

4.3.3 Merging the companies

Some of the companies in this study carry out its business in one single company whereas
others are a part of a group. That is, a parent company owning one or a few sub compa-
nies. We have merged the companies which are part of a group in order to get a more accu-
rate picture. This is simply done by adding the different companies’ assets, turnover and
number of employees respectively. Calculations are done according to the formulas pre-
sented above.

22
 Empirical Findings

5 Empirical Findings
This chapter outlines the findings for the interviewed companies from the conducted interviews followed by fi-
nancial ratios comparing the companies to the industry and finally an interview with a credit officer is pre-
sented.

5.1 Overview of the companies

Table 5.1 - Overview of the companies

Express Haulage Forwarding

Delivery Contractor Agent
Claesson Transport ■ ■ ■
June Express ■ ■ ■
Expresstransport ■ ■
Hit&Dit ■ ■
Alfa ■
Transflex ■

The company names in the table above represent the whole group if the company consists
of more than one company. The columns, defined in section 4.2, refer to the different
kinds of services the company/group offers. Claesson Transport and June Express offers
all three services while Hit&Dit and Expresstransport offers express deliveries and operates
as haulage contractors. Alfa and Transflex offer only forwarding agents services.
It is important to mention that all of the studied companies have built, bought or expanded
their facilities during 2006 and 2007; none of these investments are included in the annual
reports available. This implies that the graphs and figures vary from today’s levels. The fig-
ures in this thesis are gathered from either the fiscal year of 2005 or from 2005/2006.

5.2 Claesson Transport

Claesson Transport is a family business
founded in Sandhem. Transports are Turn over: SEK 60 M (2005-12-31)
mainly done within Scandinavia and Employees: 35
mostly to Norway. We have inter-
viewed Göte Claesson who is founder, Founded: 1965
owner and CEO and he was born in
the early 1940s. Göte Claesson had Ownership: 1 owner
previous experience from the industry
as a truck driver when he acquired the Figure 5.1 - Short facts of Claesson Transport
business. Trough the years the com-
pany has grown steadily and it is now a group of three different companies. (G. Claesson,
personal communication, 2007-04-12). A separate company owns the property, and the
forwarding agent rents these facilities from the parent company. The latter is then owner of
the sub company, a haulage contractor that also offers express delivery, hired to carry out
the group’s transports and deliveries (G Claessons Fastighets AB 2006; Göte Claessons
Transport Aktiebolag 2006).

23
 Empirical Findings

The diagram to the right shows that Claes-

Capital Structure (2005-12-31)
son Transport has proportionally much long-
term debt, even more than what it has short-
100%
term debt and equity together. Claesson 18%
Transport does not rent nor lease any of 80%
their trucks, all of them are owned. Previ-
ously Göte Cleasson took bank loans or 60%
55%
loans directly from Volvo or Scania to fi-
40%
nance their trucks. Today, he has increased
their line of credit in order to finance their 20%
trucks by short-term debt instead. 27%
0%
It is lower interest rate on the loan for prop-
erties compared to loans on vehicles and that Equity Long-Term Debt Short-Term Debt
is the major reason to why they have focused
on amortizing the loans on the trucks and in-
Figure 5.2 - Claesson Transport's capital structure
stead increase the loans on the premises.
Another reason is of course that trucks decrease in value over time whereas the premises
most certainly increase in value (G. Claesson, personal communication, 2007-04-12).
The owner prefers internal financing and as a second alternative bank loans. He has a long-
term view of growth. Göte Claesson declares that he has no desire to expand the business
as rapid as possible but instead he prefers the company to grow slowly in order to remain
the control of the business which he means has to do with his risk awareness. He refers to
the economical crisis in Norway in 1989 and the problems Sweden faced in 1991 and be-
lieves that the companies would not have been able to survive these fluctuations in the
economy as good as they did if they would have been growing faster then what they have
been doing. The crises have made Göte Claesson more careful towards the industry today.
Göte Claesson makes the decisions of how to structure the capital solitary (G. Claesson,
personal communication, 2007-04-12).
When the company recently invested in new properties Göte Claesson applied for a loan
from the bank for the entire amount. However, he had to invest some internal capital later
on as his calculations of the building costs were a bit optimistic. The dream is to be totally
independent of the bank and Claesson Transport’s policy is to own all assets, and not to
lease or rent anything. As far as it is possible he tries to finance without external financing
from the bank (G. Claesson, personal communication, 2007-04-12).
UC AB awarded Claesson Transport with the highest possible credit rating which the CEO
regards as a bonus for performing good business but nothing he actively have in mind
when deciding the capital structure (G. Claesson, personal communication, 2007-04-12).

5.3 June Express

We interviewed Sven Lundahl, founder, owner and executive manager (June Express does
not have a CEO). Sven Lundahl was born in the late 1940s. June Express is a family busi-
ness that Sven Lundahl bought 30 years ago, by taking a bank loan. Sven Lundahl had ex-
perience from the industry when he acquired the business from other companies in the
same sector. Today, Sven Lundahl is not the only owner since his children now has started
the process of succeeding him and taking over the business. The board of directors con-

24
 Empirical Findings

sists of Sven Lundahl, his three chil-

dren and his former CFO, the five of Turn over: SEK 50 M (2005-12-31)
them make the decision of capital Employees: 49
structure together (S. Lundahl, per-
sonal communication, 2007-04-24). Founded: 1978
June Express consists of a parent com-
pany functioning as a forwarding agent Ownership: 4 owners (family)
which owns three sub companies Figure 5.3 - Short facts of June Express
which are haulage contractors that also
offer express delivery (Finnvedens Flytt AB
2006; June Express Aktiebolag 2006; June
Expressbud AB 2006; Nässjö Expressbyrå Capital Structure (2005-12-31)
Aktiebolag 2006).
100%
The diagram to the right shows June Ex-
press’s capital structure, where equity ac- 80% 42%

counts for approximately a third of total capi- 60%

tal and short-term debt is almost twice as large
24%
as long-term debts. 40%

Sven Lundahl desires a low debt ratio and 20% 34%

hence does not regard it to be optimal to fi-
nance everything with equity. Sven Lundahl 0%

cannot see any disadvantages with the firm’s Equity Long-Term Debt Short-Term Debt
current capital structure. June Express owns
all trucks and vehicles except the ones weigh-
ing less than 3500 kg; this is due to VAT regu- Figure 5.4 - June Express's capital structure
lations (S. Lundahl, personal communication,
2007-04-24).
June Express does not have any specific policy about capital structure, since Sven Lundahl
has been the only owner for a long time; he has made all the decisions. He tries to have a
reversed style and believe that all purchases should be well motivated. He even considers
himself in his way of running the business to be a bit parsimonious (S. Lundahl, personal
communication, 2007-04-24).
“It is a certain way of living always having liquid assets to be able to do good business with” (S. Lundahl,
personal communication, 2007-04-24, translated into English).
Sven Lundahl claims that he is risk aware in the sense that he always makes two calcula-
tions or cost estimations; best and worst case scenario. He claims that a low amount of
debts and a high liquidity holds over time (S. Lundahl, personal communication, 2007-04-
24).
Sven Lundahl bought the property in 1982 and expanded the terminal in 2004 and will start
to expand it even more by a new building in end of April 2007. They will finance this new
building by debt through a bank loan (S. Lundahl, personal communication, 2007-04-24).
The company’s managers prefer to finance investments with a combination of re-invested
profits and bank loans. Internal financing is preferred but bank loans are not avoided. A
low rate of debt is solid to have. Except from bank loans and previous profits June Express
also uses the financial organizations of the truck manufacturing companies since he regards

25
 Empirical Findings

them to have fairly good interest rate and conditions (S. Lundahl, personal communication,
2007-04-24).
When June Express is going to undertake a bank loan the managers apply for a loan for
how much they believe they will need. Sven Lundahl believes that they have a good contact
with the bank, since the bank has said that they happily provide them with more loans
when they need it (S. Lundahl, personal communication, 2007-04-24).
June Express used to receive the highest rating by Dun&Bradsstreet but lost it a few years
ago due to low liquidity. Sven Lundahl believes that a good rating is important in the con-
tact with suppliers. June Express does not actively strive to score the highest credit rating
possible, but regards it more important not to score the lowest (S. Lundahl, personal com-
munication, 2007-04-24).

5.4 Expresstransport
Expresstransport is a family owned
transporting company based and Turn over: SEK 15 M (2006-04-30)
founded in Huskvarna by the brothers
Employees: 28
Thomas and Magnus Bäverholt. They
make all decisions together. We inter- Founded: 1987
viewed Thomas Bäverholt who is
founder, owner and manager (Express- Ownership: 2 owners (family)
transport does not have a CEO).
Thomas Bäverholt was born in the late Figure 5.5 - Short facts of Expresstransport
1950s and his brother in the early
1960s (T. Bäverholt, personal communication, 2007-04-12). Expresstransport consists of
two companies; one owning the property which is rented by the haulage contractor com-
pany that also offers express delivery (Expresstransport Thomas & Magnus Bäverholt AB,
2006; T. Bäverholt, personal communication,
2007-04-12).
Capital Structure (2006-04-30)
The diagram shows that Expresstransport
has proportionally more long-term debt than 100%
short-term debt. Equity and short-term debt 31%
80%
accounts for approximately one third each.
60%
The two brothers prefer to finance the com-
41%
pany’s activities with internal financing as far 40%
as possible. However, Thomas Bäverholt re-
gards Expresstransport not to face any prob- 20%
28%
lems being granted bank loans and to have a
good contact with the bank. The last few 0%

years, bank loans have been used only to fi- Equity Long-Term Debt Short-Term Debt
nance a few cars and the office facility. The
strategic reason for financing a couple of
cars with debt was to use their equity to Figure 5.6 - Expresstransport’s capital structure
partly finance the office facility. The current
office facility was to 90 % financed with bank loans and 10 % equity. They aim to amortize
this loan as quick as possible. The loan was taken three years ago and so far 50 % is paid
off (T. Bäverholt, personal communication, 2007-04-12).

26
 Empirical Findings

Thomas Bäverholt explains that they always have had a restricted behaviour towards debt
and that it has to do with their risk aversion. He claims that you should take in considera-
tion that business can decrease any time and when it does, it is not good to have large
amount of loans. Therefore, he and his brother prefer to reinvest previous earnings above
bank loans. They have never put money into the company themselves (T. Bäverholt, per-
sonal communication, 2007-04-12).
The tax advantages from having bank loans are not being considered. Thomas Bäverholt is
not worried that the interest rate will increase drastically; the gas price is a bigger problem.
Apart from the bank loan, Expresstransport also have a line of credit that normally only is
being used a few days per month, in the gap between paying suppliers and receiving pay-
ments from customers (T. Bäverholt, personal communication, 2007-04-12).
Leasing is used to finance cars weighing less than 3 500 kg; this is due to tax advantages,
(the outgoing VAT). When financing larger vehicles leasing is not an option (T. Bäverholt,
personal communication, 2007-04-12).
None of the owners have a desire for the company to grow bigger. At several points in the
history they have felt that the company was big enough. Even though, they have let the
company grow and expand during the past couple of years (T. Bäverholt, personal com-
munication, 2007-04-12).
A disadvantage they can see with their current capital structure is that they are not able to
pay themselves as much salary as they maybe would have if they financed by loans to a
greater extent (T. Bäverholt, personal communication, 2007-04-12).
According to Thomas Bäverholt, the company has the highest rating from Dun&Bradstreet
which they considered cheerful to receive, but credit rating is nothing that they actively
think about when deciding upon their capital structure. Customers do not comment on it
while the gas supplier, which is an important creditor, considers it carefully. (T. Bäverholt,
personal communication, 2007-04-12).

5.5 Hit&Dit
Hit&Dit is a small family business lo-
cated in Habo, owned by Catrin Jal- Turn over: SEK 15 M (2006-06-30)
kander and Stig Jalkander where the lat-
Employees: 16
ter is a passive owner (J. Svensson, per-
sonal communication, 2007-04-19). It is Founded: 1999
a single company which is a haulage
contractor that also offers express deliv- Ownership: 2 owners (family)
eries (Hit&Dit Alltjänst Catrin Jalkander
AB, 2006). We were recommended by Figure 5.7 - Short facts of Hit&Dit
the founder and CEO, Catrin Jalkander,
to interview the CFO, Jörgen Svensson.
Catrin Jalkander had no previous experience of how to run a company when she bought
the company, but she had insight in the industry since she has been working as a driver.
Since Catrin Jalkander acquired the company it has grown rapidly and the number of cars
has increased drastically. Deliveries are within Sweden and some parts of Europe. Haulage
contracting is approximately 70 % of their business while express deliveries stand for the
remaining 30 %. Catrin Jalkander and Jörgen Svensson make the decision of capital struc-

27
 Empirical Findings

ture together and were born in the mid 1960s Capital Structure (2006-06-30)
and late 1950s respectively (J. Svensson, per-
sonal communication, 2007-04-19). 100%

The diagram shows Hit&Dit’s capital struc- 80% 41%

ture where equity, short-term debt and long-
term debt account for approximately one 60%
third each. 29%
40%
The company have no written policy about
20%
their capital structure but they prefer to fi- 30%
nance investments through bank loans, in 0%
second hand with reinvested earnings and
last, with capital from owners (J. Svensson, Equity Long-Term Debt Short-Term Debt

personal communication, 2007-04-19).

Leasing is used when financing cars weighing Figure 5.8 - Hit&Dit's capital structure
less than 3 500 kg; due to the tax advantages.
The larger trucks are all financed by bank loans. The property that was acquired a few
months ago is also financed to 100 % trough debt. Jörgen Svensson claims that the reason
for using bank loans to this extent is because they do not want to drain their liquid assets.
The company also has line of credit that never has been used. It is just there for safety rea-
sons (J. Svensson, personal communication, 2007-04-19).
Jörgen Svensson explains that his and Catrin Jalkander’s view of risk and growth somewhat
differs. While she thinks they can bear a higher risk and grow faster he sometimes feels that
he has to hold her back (J. Svensson, personal communication, 2007-04-19).
Jörgen Svensson does not see any disadvantages with their current capital structure. Risk
and a possible increasing interest rate are not being considered when deciding upon the
capital structure (J. Svensson, personal communication, 2007-04-19).
Hit&Dit has the highest possible credit rating. Jörgen Svensson and Catrin Jalkander have
just started to compare the company to industry indexes, and so far it has not affected their
capital structure (J. Svensson, personal communication, 2007-04-19).

5.6 Alfa
Alfa Quality Moving (Alfa) is a com-
pany specializing in international Turn over: SEK 145 M (2005-12-31)
moves; they are represented in Goth-
Employees: 41
enburg, Malmö, Stockholm and
Jönköping. It was founded by four Founded: 1995
former colleagues at another moving
company who saw the possibility of Ownership: 3 main (family), 5 minor
starting their own business. Alfa has
local representatives in Sweden, Nor- Figure 5.9 - Short facts of Alfa
way, Finland and Denmark that helps
mainly companies to move their personal belongings for their over seas stationing. We in-
terviewed Christer Bosmyr who is founder, owner and CEO of the company. Christer
Bosmyr was born in the late 1960s. (C. Bosmyr, personal communication, 2007-04-12).
Alfa consists of one company owning the property and another functioning as a forward-

28
 Empirical Findings

ing agent company (Alfa Quality Moving AB, Capital Structure (2005-12-31)
2006; Beta Flyttkonsult AB, 2006; Fastighets
AB Grossistgatan 7, 2006). 100%

Alfa’s capital structure is shown in the dia- 80%

gram to the right. Alfa does not have any
69%
long-term debt in form of a bank loan or 60%
similar, the 5 % shown in the graph are due to
40% 5%
the 28% of the untaxed reserves. Alfa has a
high proportion of short-term debt which ac- 20%
counts for just over two thirds of their total 26%
capital structure. 0%

Alfa finance most of their business through Equity Long-Term Debt Short-Term Debt
short-term liabilities. This is due to the fact
that Alfa functions as a forwarding agent sell-
ing services that are hired from a third party. Figure 5.10 - Alfa’s capital structure
The company has no long-term loans but have a high line of credit that is used to a greater
extend at certain times of the year since the business faces heavily seasonal fluctuations.
The decision of capital structure is made at the board level (C. Bosmyr, personal communi-
cation, 2007-04-12).
At a point in time, ALMI-företagspartner served as a lender to the company financing an
investment, which Christer Bosmyr believed turned out to be an expensive source of capi-
tal. Alfa borrowed money from the bank several times during the first years and are thank-
ful for them and the very good relation they have had through out the entire company his-
tory. The bank has never refused to lend any money to Alfa but there have been times
where different amounts of persuasion have been needed, which lead to slightly higher in-
terest rates (C. Bosmyr, personal communication, 2007-04-12).
The current capital structure is not based on any written policy but there is a philosophy,
based on the board members knowledge, that internal capital should be used as a primary
source of finance for investments. Furthermore, Alfa would prefer to use bank loans be-
fore of asking the shareholders to add own capital and only as a last option ALMI företag-
spartner would be considered. In addition, C. Bosmyr claims that “It would be ideally if we did
not need to borrow any money at all” (personal communication, 2007-04-12, translated into Eng-
lish)
The operational part of the group barely has any bank loans whereas the property company
has relative much borrowed capital. According to Christer Bosmyr borrowing for the op-
erations can be very risky but property management is less risky and especially in Alfa’s
case where it is divided into different companies (C. Bosmyr, personal communication,
2007-04-12).
Christer Bosmyr argues that from the company’s perspective it might have been preferred
to use a greater amount of debt since that capital should be considered cheaper. The own-
ers, however, do not consider their invested capital as a short-term investment where a
high dividend pay-out is a main target. Instead, aligned with their strategic goals of growing
slow and steady, with a long-term view and careful investments, the board members find
the present capital structure suitable. Possibly Alfa is too careful and ought to undertake
more investments than what they do considering the development they have had (C. Bos-
myr, personal communication, 2007-04-12).

29
 Empirical Findings

The company has the highest credit rating even though this never has been a goal and no
actions have been taken to reach this rating. The bank has served as an active part during
the building of the company and the amount of borrowings is a result from a dialogue be-
tween them (C. Bosmyr, personal communication, 2007-04-12).

5.7 Transflex
Transflex is a forwarding agent with
Turn over: SEK 85 M (2005-12-31)
road transports in the Nordic countries
and Europe. 90 % of all transports are Employees: 12
made abroad. The founders of Trans-
flex worked until 1998 for Schenker Founded: 1998
Transport AB when they decided to
Ownership: 3 main, 3 minor
start their own business. Today, the
group consists of five independent Figure 5.11 - Short facts of Transflex
companies in five Swedish cities. This
study only focuses on the Jönköping companies. Transflex does not have any employed
drivers; instead, they hire all personnel through outside haulage contractors. We inter-
viewed Michael Grennard who is founder, owner and CEO. Michael Grennard was born in
the early 1950s (M. Grennard, personal communication, 2007-04-11).
Transflex in Jönköping consists of a parent company owning a property that it rents to the
forwarding agent (TF i Jönköping AB, 2006; Transflex i Jönköping AB, 2006). The foun-
ders were able to start the business without taking an initial bank loan. This was possible
since they managed to get their customers to pay them before they had to pay their suppli-
ers (M. Grennard, personal communication, 2007-04-11).
The diagram to the right shows that Trans-
flex has approximately half of their capital in Capital Structure (2005-12-31)
equity and half of its capital as short-term
debt. The long-term debt only accounts for 5 100%
% which is solely due to the taxable amount
80%
of the untaxed reserves. 50%

Transflex has no well defined, written or 60% 5%

stated policy for their capital structure. There 40%
are three owners who also function as board
members and managers. The three of them 20% 45%
make the decision of how to structure the
capital together. Transflex have never con- 0%

sidered tax-relieves as an advantage of bank Equity Long-Term Debt Short-Term Debt

loans, but rather the simplicity of handling
financing without another actor. They have
never felt that they have had any problems to Figure 5.12 - Transflex's capital structure
receive a bank loan due to their high level li-
quidity and profitability. The operational part of Transflex does not have any bank loans at
all, simply because they see no need for it. Their policy is to finance the business as far as
possible without any bank loans (M. Grennard, personal communication, 2007-04-11).
“The less dependent you are of the bank - the better” (M. Grennard, personal communication,
2007-04-11, translated into English).

30
 Empirical Findings

Even though Transflex prefers internal financing they are not actively avoiding borrowing
money from banks. Last year they chose to undertake a bank loan to invest in new proper-
ties. Since the land lots were about to be sold out, however, if they were able to, they would
have preferred to use their own capital. They want to amortize these loans as soon as pos-
sible by large dividends from the operational company in order to, again, be independent of
the banks (M. Grennard, personal communication, 2007-04-11).
According to Michael Grennard, the most important advantage with their current capital
structure is that it gives them an ability to act immediately without having e.g. the banks
approval before making a decision. On the other hand, he has never felt that they have
faced any drawbacks with their current capital structure. Transflex have a yearning to grow
slow and steady and has what Michael Grennard refers to as an ”industrial way of thinking”
and compares to the information technology sector where everything has to be done im-
mediately. In the short-term, of course, he claims that there exist economical advantages if
one chose to issue debt, but it the long run he believes that their way of thinking is superior
for this industry (M. Grennard, personal communication, 2007-04-11).
When Transflex borrow money it is the need that decides the amount borrowed, risk is not
a factor affecting this decision. Michael Grennard has the point of view that a service com-
pany does not need to take bank loans since they can rent everything (M. Grennard, per-
sonal communication, 2007-04-11).
Transflex prefers to use internal financing and as a second alternative to use debt. Leasing
is not something that Transflex uses and clearly prefers to invest money and buy forklift
trucks and other equipment needed (M. Grennard, personal communication, 2007-04-11).
UC AB awarded them with the highest rating but the CEO argues that this high credit rat-
ing is of course pleasurable to receive but nothing that the company takes certain actions to
receive. Their capital structure is based upon other parameters than external credit institu-
tions (M. Grennard, personal communication).

31
 Empirical Findings

5.8 Financial ratios

In the figures below, the data is collected from the companies’ annual reports and further
calculated by the formulas in section 4.3.2 To facilitate the comparison the mean for the
studied companies (purple line) and UCs industry median (yellow line) for companies in the
road freight industry with at least 20 employees are presented in the figures below (see data
table in Appendix 3). Here, it must be said that Hit&Dit and Transflex do not have 20 em-
ployees but we choose to use this index since we considered it to be the most suitable cate-
gory.

Debt Proportions

100%

80%
Industry Median
60% Sample Mean

40%

20%

0%
Claesson June Express- Hit&Dit Alfa Transflex
Transport Express tranport

Figure 5.13 - Debt proportion

The companies in this study have notably lower debt, both short-term and long-term debt,
proportions than the industry median from the same year. Inline with the expressed dislike
towards debt from all companies except Hit&Dit, these six companies have less debt pro-
portions than similar companies in Sweden.

Return on Asset

25%

20%

15% Sample Mean

10% Industry Median

5%

0%
Claesson June Express- Hit&Dit Alfa Transflex
Transport Express tranport

Figure 5.14 - Return on asset

Five of the studied companies are more efficient and profitable than the industry median
since they are able to generate a better return in proportion to the capital employed. From
a capital structure perspective, this is an important financial ratio since it reveals how much
money that is generated by the business.

32
 Empirical Findings

Risk Buffer

25%

20% Sample Mean

Industry Median
15%

10%

5%

0%
Claesson June Express- Hit&Dit Alfa Transflex
Transport Express tranport

Figure 5.15 - Risk buffer

This figure illustrates the companies’ buffer, or margin, for how much debt a company can
bear. If a company would have a low value in this ratio, it would imply that the company
barely could meet the cost of debt with the returns generated by the firm. A high value im-
plies that the company could handle more debt.

5.9 Credit officer

Hans Guldstrand, credit officer at SEB, told us that the bank mainly consider three things
before giving companies credit; whether they can trust the management/owner, if they un-
derstand the business idea and if the company has a solid cash-flow. The level of debt for a
company is highly affected by the firm’s turnover. Companies with approximately less than
SEK 50 M tend to only use a line of credit and possibly finance e.g. trucks that can work as
a security with a loan. For these companies no certain capital structure is required. For lar-
ger companies on the other hand, which normally issue more debt, the bank has special
credit agreements which require certain levels of e.g. profitability and equity. Hans Gull-
strand also commented that the bank usually not affect the amount of debt a company is-
sues. He also explains that companies owning their trucks probably have more debt issued
than forwarding agent companies (H. Guldstrand, personal communication, 2007-05-15).
According to Hans Guldstrand there is a huge competition from the rest of Europe within
the road freight industry. Road freight companies follow the business cycle and therefore
he thinks they have to be more risk aware. They have to be able to survive a recession with
existing number of cars; one can not sell them just because they face slower times. He also
pointed out that the owners in this branch normally have many years of experience from
e.g. the crisis during the 1990s which probably increases the risk aversion (H. Guldstrand,
personal communication, 2007-05-15).
Further on we told him that the companies studied all performed better than industry me-
dian. He elaborated on this fact to be due to Jönköping’s location. Because of the good lo-
cation trucks should be able to carry goods in both directions which in turn lead more in-
comes (H. Guldstrand, personal communication, 2007-05-15).

33
 Analysis

6 Analysis
The following chapter analyzes the capital structure decisions of the companies presented in chapter 5 based
on the theories described in chapter 3.

6.1 Analysis of capital structure

Capital Structure Comparison

100%

80%
Short-Term Debt
60% Long-Term Debt
Equity
40%

20%

0%
Hit & Dit
June Express
Claessons

Express-
transport

Transflex
Alfa Quality
transport

Moving

Express delivery,
Express delivery and Transport & Logistic
Haulage Contractor and
Haulage Contractor
Transport & Logistic

Figure 6.1 - Capital structure comparison

The diagram above shows the capital structure data presented in the empirical findings
from each company together in one graph clearly showing the differences between the six
of them. The proportion of equity in the companies we have studied ranges from 26.6 % to
44.9 % with an average of 31.5 %. Compared to the industry index that has a median of
21.7 %, all of our observations have higher equity proportions (see Figure 5.11). Due to the
limited number of observations in our study, we cannot claim that the road freight compa-
nies in the Jönköping area have a higher equity proportion than similar companies in Swe-
den. However, we clearly see that the median road freight company, according to the in-
dustry index, has a higher debt proportion than the studied firms.

6.2 Analysis of M&M theorem

None of the companies in our study seem to consider such an optimal capital structure
presented by Modigliani and Miller (1958) but rather follow the theory presented by Barton
and Matthews (1989) which suggest that SMEs do not seek to maximize the owners’
wealth.
Hit&Dit prefers long-term debt issued through bank loans before internal financing. The
reason for this is not due to the facts presented by Modigliani and Miller (1958) but rather
in order to have liquid assets available. Expresstransport, on the other hand, wants to be as
independent from the bank as possible. However, Figure 6.1 makes it obvious that Ex-
presstransport have a higher percentage of long-term debt than Hit&Dit. This is according
to Matthews et al. (1994) the difference between beliefs about debt and attitudes towards
debt as further analyzed in section 6.4.

34
 Analysis

None of the interviewees care about the fact that debt is a cheaper alternative of financing.
Some agreed that there are advantages with debt financing referring to the tax-deductibility,
adding that it would come at the cost of increased risk, reduced independency and the di-
minished ability to operate fast. All companies except Hit&Dit have clearly stressed that
the strategy of a slow, steady and less risky growth is preferred, and therefore, debt financ-
ing should be avoided. Hit&Dit are less averse to bank loans but nor do they choose debt
on the basis that debt is cheaper than equity.
Figure 5.13 shows that all companies but Expresstransport lie above the industry median
which indicates that they could issue more debt without facing the risk of bankruptcy. The
companies should be able to increase their debt proportions and in line with M&M theo-
rem make greater profits. Though, the companies do not seem to consider these pure fi-
nancial aspects of their capital structure decision. Rather, they seem to follow the pecking
order theory.

6.3 Analysis of the pecking order theory

In our study management of all firms but Hit&Dit prefer internally generated funds before
issuing debt from banks. These findings go hand in hand with the pecking order theory
(Myers, 1984). In line with Barton and Matthews’ (1989) findings, all of our observations
indicate that internal financing could be based upon the idea of being independent and re-
maining control of the firm.
Alfa, Transflex, Claesson Transport and June Express actively choose to finance with in-
ternal capital in order to be able to act fast which is perfectly in line with Myers and Majulf
(1984) ideas. Hutchinson (1995) argues that the pecking order theory is valid for SMEs
since they have a more restrictive approach towards debt. This was clearly confirmed by
Transflex which saves funds for future investments. According to the pecking order theory
firm management will only as a last alternative issue new shares (Wramsby & Österlund,
2004). This was exactly the case in our empirical findings where all firms owners/managers
claimed that they did not considered any other alternatives to finance investments than
through retained earnings or by taking loans from creditors.
Figure 5.11 clearly indicates that our studied companies use less debt and hence more eq-
uity than the industry median. This can be due to the pecking order of financial sources a
company chooses to use. The industry median captures all companies in the road freight
industry with at least 20 employees, this also includes large businesses. Therefore, it is natu-
ral that the six SMEs in our study have a proportion of debt that is lower than the industry
median, since Hutchinson (1995) argues that the pecking order theory is well applicable on
SMEs.

35
 Analysis

6.4 Analysis of SMEs strategic capital structure decision

We could clearly identify Barton and Matthews (1989) ideas about capital structure decision
being a strategic rather than a financial issue. The goals of the firms reflect from a strategic
point of view the firms’ capital structure (Barton & Matthews, 1989). Pursuing profit
maximizing in a short-term perspective, which all of our observations discarded, would in
line with Pike and Neal (1993) had generated higher debt proportions ratios. Once again
the industry median indicates that this is not the case for the observed companies. Fre-
quent larger investments cannot be solely financed by reinvested capital unless the firm is
extremely profitable, and therefore debt would have been used to a greater extend if the
companies were willing to grow faster than what they have done throughout the history.
The risk-taking propensity and financial characteristics of the firm affect lenders willingness
to offer credits (Barton & Matthews, 1989). Hans Guldstrand argues that the characteristics
of the management are as important as having a solid cash flow. Financial characteristics of
the firm moderate the ability of top management to select a capital structure for the firm
(Barton & Matthews, 1989). June Express, Expresstransport, Hit&Dit and Transflex seems
to have no difficulties choosing their capital structure since the bank has granted them
bank loans at all times, according to the managers. This is an issue that should be critically
interpreted since the interviewees, according to Delmar and Davidsson (1993), naturally
not brings up drawbacks and weaknesses of the company. Perhaps the interviewees are
completely truthful but it is likely that the interviewees not choose to be equally honest as
Alfa’s CEO who said that they have had some difficulties to receive bank loans and that
different amounts of persuasion have been needed. The companies in our study have a
higher equity proportion, return on assets and risk buffer compared to the industry median.
This indicates that the bank would be willing to lend them money. This is what Peterson
and Rajan (1994) refer to as management’s ability to affect the capital structure decision
depending on the ability of the company to generate a solid cash flow. But, again the final
decision on whether the companies are granted loans depends on the banks’ perception on
the risk they engage themselves to when lending money. As Hans Guldstrand argues,
managerial characteristics are important.
Mattews et al. (1994) argues that there is a difference between beliefs about debt and atti-
tudes towards debt. Companies vision about debt does not always go hand in hand with re-
ality, attitudes towards debt can be interpreted as realized needs for debt. Claesson Trans-
port has the proportionally largest percentage of long-term debt of all companies studied.
They have more than twice as much long-term debt proportion compared to June Express,
even though we argue that they are similar in many ways and have similar beliefs of capital
structure.
All companies interviewed bought, built or extended properties during 2006, mostly fi-
nanced through debt. This shows that the demand for services in the road freight industry
is ballooning. Most of the interviewees desired to only finance with internally generated
funds from previous years profits, but all of them used debt more or less. This realized
demand for external financing is greatest in the current economic boom, is a feature for the
road freight industry indicated by Quinet and Vickerman (2004) and credit officer Hans
Guldstrand. Hence, we argue that the entire economic cycle is affecting these six SMEs
capital structure decisions since they would not have chosen to undertake large bank loans
during the last year if the demand for their services not followed the economic cycle.
Our empirical findings appear to confirm Matthews et al. (1994) and Romano et al. (2001)
ideas that the personal characteristics of the managers and owners play a dominant role in

36
 Analysis

the decision of the capital structure. Hence, capital structure decisions should be analyzed
by the impact of owner/manager’s personal reference and values of the firms’ characteris-
tics. Expresstransport, Transflex, Alfa and Claesson Transport all strive for total independ-
ence from the bank and appreciate to be debt free, whereas Hit&Dit and June Express rec-
ognize advantages with certain levels of debt. This is what Matthews et al. (1994) refers to
as beliefs about debt. Even though four of the interviewed companies prefer to not issue
any debt at all, none of them is financing solely through internally generated funds. All of
the companies have chosen to undertake a bank loan to finance their new properties al-
though they would have preferred to finance by internally generated funds. This is what
Matthews et al. (1994) refers to as attitudes towards debt. Even if the managers/owners are
negative towards external financing compared to internal financing they still use external
capital in some situations. Their capital structure decision is thus affected by their manage-
rial and personal beliefs about debt to certain level, but not hindering them to undertake
larger debt financed projects. We can see a difference in size and equity proportion of com-
paring the studied companies, but their beliefs and realized needs of long-term debt is simi-
lar.
Expresstransport and Transflex beliefs about debt strongly colour their attitudes towards
debt making their capital structure decision heavily affected by their personal view of debt.
Their unwillingness to use debt as a form of financing, together with their willingness to be
independent from the bank, affect their pace of amortizing their bank loans. Both wish to
amortize their loans as fast as possible to revert to their preferred capital structure.
We had an idea that credit rating might affect the companies’ capital structure decision.
This idea was to some extent supported when we scanned the market for companies to in-
terview and noticed that Expresstransport’s webpage told the readers that they were AAA
rated by Dun&Bradstreet. This made us curious about whether firms deliberately decide on
their capital structure in order to reach a certain credit rating. However, we were surprised
to find out that this was not the case. None of the companies even mentioned a relation
between their credit rating and their capital structure but rather saw it as a bonus. Only one
company stressed that it is important not to be rated in any of the lower categories since
that might affect the suppliers willingness to deliver and banks willingness to give them
credits.

6.5 Analysis of risk

There are four factors argued by Delmar and Davidsson (1993) that affects the level of risk
a company is willing to bear. One is social skills. They argue that if the CEO and owner of
a company listen to other companies’ experiences and are open for information they will be
more positive towards risk. This socializing behaviour or lack of the same might be a
strong reason for our companies’ decision of capital structure, but it is hard for us to get a
deep understanding of the business leaders social skills during interviews lasting less than
an hour. Hence, we have chosen not to focus upon this subcategory.
The desire and willingness to let the business grow, and management’s need for achieve-
ment is considered to affect the risk level a company chooses (Delmar & Davidsson, 1993).
All companies but Hit&Dit prefer a slow and organic, internally funded, growth over a
rapid and externally funded growth. Hence, it seems to be a clear connection between slow
growth and management’s risk-taking propensity.

37
 Analysis

According to Delmar and Davidsson (1993) the risk level a company take on is affected by
competence of managers and the awareness of present risk taken, this goes very close with
self realization about how much risk they can bear. We argue that a high degree of compe-
tence strongly affects the self realization, since the interviewed managers are experienced
business men and women with knowledge about the industry and its opportunities and
threats. We think that it can be compared with beliefs about debt and attitude towards debt
(Matthews et al., 1994). At the same time the owner/managers recognize that they could
not function and grow without it. This kind of self realization is most probably affected by
the competence level of top management.

In Figure 5.11 we can see that the interviewed companies have a lower debt proportion
compared to the industry which suggests that management’s risk-taking propensity is lower
in our cases compared to the industry median. Since increased proportions of debt in-
creases the risk (Chittendale et al., 1996) and all of our observations have a significantly
lower proportion of debt financing than similar companies all over Sweden, we have rea-
sons to believe that the studied firms are risk averse.
Claesson Transport, June Express and Expresstransport are all founded before the big
economic crisis that Sweden faced in the beginning of the last decade. Today, they all be-
lieve that careful investments and slow growth is a superior strategy compared to rapid ex-
ternally financed growth. In our opinion, the experiences they possess from the recession
make them more restrictive towards the risk of undertaking bank loans. Transflex, Alfa and
Hit&Dit were founded in the late 90s and these companies were hence not affected by the
recession. However, all managers were active in the industry during this period and there-
fore experienced the harsh times and possibly developed a restrictive approach towards
risk. This was confirmed by Hans Guldstrand who believes that this kind of experiences af-
fect the companies’ capital structure decision since it makes the managers more restrictive
towards debt as a source of finance.

6.6 Analysis of firm characteristics

The theory of Romano et al. (2001) suggests that older businesses tend to issue more debt
since they are able to control more assets. This theory is not fully applicable since the
youngest company, Hit&Dit, issue proportionally more debt than the second oldest firm,
June Express. On the other hand, Peterson and Rajan (1994) argue that matured compa-
nies tend to use less debt since they have had possibilities to raise debt by previous reve-
nues, which might be true for June Express but certainly not for Claesson Transport.
Transflex were able to start doing business without an initial bank loan. This might suggest
that business age is not an equally strong factor for Transflex as for the other companies
where a mature age means that the company have had a chance to pay off debts and raise
own capital. Alfa started with debt as the primary source of finance and they have due to a
boosting turnover a similar capital structure as Transflex today, which also suggests that
age of firm, is not a vital element affecting the capital structure.

Chittendale et al. (1996) argue that smaller businesses to a greater extent have to rely on
short-term debt. This is supported by Figure 6.1 which shows that the studied companies
generally use short-term debt to a greater extend then long-term debt. However, the inter-
viewed companies have made the decision to actively avoid bank loans and not as argued
by Chittendale et al. (1996) because they face difficulties to receive bank loans. As claimed
by Sogrob-Mira (2005), our study shows that several of the companies prefer short-term

38
 Analysis

debt before long-term debt in order to be able to operate fast and be able to accept a pro-
ject without the intervention of a bank. This supports the ideas presented by Chittendale et
al. (1996) since a line of credit can be used at any time for any reason without the permis-
sion from creditors. Alfa and Transflex have large proportions of short-term debt since
they serve as the link between the costumer and the haulage contractors/express delivery
firms and therefore most services sold appear to some extend in the accounts payables, i.e.
the short-term debt. Forwarding agents do not need to possess assets such as vehicles.
Haulage contractors and express deliveries need cars and trucks to be able to carry out its
business and hence have a stronger need for external financing.
According to Ward (2004) the age of the CEO affects the decision of capital structure; ol-
der entrepreneurs are less willing to take bank loans than what younger entrepreneurs are.
Our study does not support this idea since Göte Claesson, who is the oldest manager, has
proportionally much more debt then the youngest manager, Catrin Jalkander. Admittedly,
Sven Lundahl, the second oldest manager, has proportionally low levels of debt, but our
study does not show any clear trends to support Ward’s (2004) findings. It is important to
bear in mind that this discussion can be pure coincidences rather than a connection. Our
sample is too small to draw general conclusions of how age of firm, age of CEO and size
of business affects the capital structure. This is most obvious when discussing the firm size
where none of the theories presented seem to be applicable on none of our studied firms.
Expresstransport declared that they at several points in time decided that they did not want
to expand their business further. Hit&Dit has grown rapidly through bank loans as its pri-
mary source of finance ever since Catrin Jalkander bought the firm. Businesses which are
run with the purpose of expanding the business are more likely to use debt as a source of
finance as argued by Van der Wijst and Thurik (1993). In line with Hutchinson’s (1995)
theory that profitable low risk project might be rejected due to a conservative view upon
debt, Expresstransport, Alfa and Transflex all argue that they would have been able to
grow faster at certain times but refused to undertake some projects due to the unwilling-
ness to obtain external financing.
None of the six companies interviewed claimed they had a plan or written policy about
how to structure their capital. It is hard to analyze whether this affects their amount of debt
but we believe that they use less planning since they rely on previous experiences and per-
sonal beliefs which is something you normally not put in print.
As clearly illustrated in Figure 5.11 – 5.13 the studied companies generally perform better
than the industry median for similar companies. The rA-ratio (see Figure 5.12) tells that the
industry median is lower than the mean of the six companies studied. The reason behind
this might be as explained in section 1.1, that Jönköping is a suitable location for a road
transporting company. Since the industry index compares all companies all over Sweden, a
similar company in a part of Sweden where the population density is lower might have dif-
ficulties experiencing economies of scale which affect the industry median negatively.
There might also be other explanations, but it is not in line with our purpose to understand
why, we just conclude that the interviewed companies perform better than the industry
median.
The fact that the studied companies perform better and have less debt than the industry
median implies that the beliefs and attitudes of the studied companies might differ from
the average road freight company in Sweden. Perhaps the six companies in this study have
better possibilities to freely choose their capital structure than less profitable firms in parts
of Sweden where the population and business density is lower.

39
 Analysis

6.6.1 Analysis of special characteristics of family businesses

All of the companies that participated in our study expect Transflex, are according to the
definition stated in section 1.4, family businesses. Göte Claesson claims that he never had
the desire for the business to grow rapid, it is more important to remain the control of the
company and avoid unnecessary risk taking. This can be referred to what Hutchinson
(1995) argues, i.e. that entrepreneurs as long as possible wants to stay independent and
therefore tend to use retained profits not to involve outside participants. Further more this
is because of their goal to stay in full control of their business. Sven Lundahl has always
been careful with and in full control of investments and important decisions. Expresstrans-
port on the other hand do not refer their restricted behaviour towards externally financed
investments by their urge to stay in control of their business. Still it can be argued that Ex-
presstransport’s nonexistent need for growth is linked to the need of family control. The
spouses and owners of Hit&Dit, Catrin and Stig Jalkander do not seem to have the same
need for family control and independency as the owners for the companies discussed
above. The company has had a big growth since they bought the business and their view of
debt financing is not by far as restricted as for the other companies. Alfa argues that it
would be ideally if they did not have to borrow money at all. This can be interpreted as a
wish to be independent and in control of the business as well as their goal to grow slow
and be careful with investments, but no clear links can be drawn between this behaviour
and family control.
Transflex is not a family business but its owners have strong need for control and decided
to be totally independent from creditors which is a typically feature for family businesses.
Hence, we can argue that the company’s owners reason in a similar manner as the family
firms do.

40
 Conclusion

7 Conclusion
In the last chapter of this thesis, the research questions will be answered and conclusions will be drawn fol-
lowed by a general discussion and ideas for further studies.

Five of the six interviewed companies clearly stated that they prefer internal financing i.e.
reinvested earnings, and as a second alternative, use debt in form of bank loans. No other
alternatives than internal financing and loans from creditors were considered by any of the
interviewed companies. Our study shows that the reasons behind this preferred order are
(1) previous experience, (2) the will of being independent and (3) managements’ risk-taking
propensity. These factors can be concluded to be more important than pure financial issues
such as cost minimizing or profit maximizing. Further on, we believe that it is these factors,
together with beliefs about debt and realized need for debt, that influence the strategy for
how the capital structure decision is formed and developed.
Age of firm and age of CEO most likely have some impact in the choice of capital struc-
ture. In our case study though, we believe this sums up to experience of the business man-
agers and owners. This experience can come from other organizations and thus size of the
firm may have less impact of the beliefs about debt. Our findings suggest that companies
reason similarly about debt as a source of finance independent of their size and age. Instead
the owners’ need for control and independency seem to have a more direct affect on the
capital structure decision.
All owner/managers claimed that it is important to be liquid and remain in control of the
business i.e. not to be dependent of external organizations like banks. The managers regard
it to be important to be able to act fast. They want to make decisions fast and easy without
banks involved. Only companies that are profitable enough to generate an extraordinary
cash flow can grow and expand without external financing.
The business leaders and owners interviewed did not talk about risk as a major factor af-
fecting their decision of capital structure. It is our belief that many of the factors they
claimed were vital for them; not to grow too fast, consider new investments carefully and
save money for bad times is due to a certain risk aversion. We can conclude that manage-
ments’ risk-taking propensity indirect affects the strategies of the companies and thus the
capital structure decision.
Owner/managers’ beliefs about debt affect their plans to achieve growth. A restrictive view
on debt leads to a more restrictive desire to grow, since growth most often needs to be fi-
nanced by debt if one wishes to expand and grow as fast as possible. Growth is dependent
upon managements’ personal values and beliefs which in turn affect the capital structure
decision.
The owner/managers’ beliefs about debt is their preferred relation between debt and eq-
uity. However, their actual capital structure represents their realized needs for debt. The be-
liefs affect the companies’ realized need which in turn forms the strategy for the capital
structure decision.

41
 Conclusion

7.1 Discussion and suggestions for further research

Our purpose was to describe and analyze the capital structure decision in a specific sector
in order for the companies to have similar needs for investments and for our conclusion to
be more valid. Generalizations could easier be drawn if the compared companies operate in
the same industry. However, we detected differences between the companies in the trans-
porting sector of road freight. When we started the process of writing this thesis we be-
lieved that the road freight industry was a clear niche, and hence, that the companies might
reason in similar manners in the choice of capital structure. Today, it is obvious for us that
the forwarding agents do not have to the same need for investments as the haulage con-
tractors and the firms offering express services.
A suggestions for further research could be to niche a study even further to be able to
compare and make more generalizations i.e. instead of studying the road freight industry as
a whole one could more narrowly study only one subcategory within the industry e.g. com-
panies doing express deliveries.
Since all six companies in our study are more profitable than the industry median, another
suggestion is to compare similar companies but in different regions. Is Jönköping a suitable
city for business in general, or are the studied companies more profitable due to the loca-
tion in the centre of south Sweden?
Leasing was not a preferred way to finance vehicles in the studied companies, which sur-
prised us since we expected this form of financing to be more common. The interviewed
companies only use leasing for light vehicles due to the VAT reasons. The
owner/managers seemed to be of the opinion that leasing is a form of financing for com-
panies that cannot afford to buy their own vehicles. It would be interesting to see why this
form of financing is not preferred; is it a coincidence that all companies interviewed prefer
to purchase all vehicles or is this trait valid for the entire sector?

42
 References

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47
 Appendices

Appendix 1 - Company interview questions

The company’s capital structure

1. How is your capital structured today?

2. Has anything significant happened since your last annual report?

3. Has your capital structure differed significantly from today’s levels through out
the history of the firm?

4. Why does your capital structure look like it does today?

5. What are the underlying factors for your capital structure?

Risk awareness
6. How high do you regard your risk-taking propensity to be?

7. Do you have any well-defined policy for your capital structure?

Advantages and drawbacks with different capital structures

8. What advantages and drawbacks do you experience with today’s capital structure?

9. What level of debt and equity do you prefer?

10. What sources of finance do you prefer and in what order?

The Bank
11. In what situations do you turn to a creditor (bank) for capital?

12. What determines the amount of capital borrowed?

13. Have you received any credit ratings?

48
 Appendices

Appendix 2 - Bank interview questions

1. What is your opinion about the road freight industry?

2. What are the most important factors considered when lending money?

3. How is a company’s capital structure affecting the amount of loan a company can
receive?

4. Is the amount of debt a company applies for ever affected by the bank?

5. What do you think about Jönköping as a location for companies in the road freight
industry?

6. Do you think owners for companies within the road freight industry are more or
less risk aware compared to other industries?

49
 Appendices
Appendix 3 - Data table
Claesson June Express- Sample Industry
Hit&Dit Alfa Transflex
Transport Express tranport Mean Median¹
Short-Term Debt 18,1% 41,7% 31,0% 41,4% 69,0% 50,1% 41,9%
78,3%
Long-Term Debt 55,3% 24,4% 41,0% 28,7% 5,0% 5,0% 26,6%
Equity 26,6% 33,8% 28,0% 29,9% 26,0% 44,9% 31,5% 21,7%
Debt Proportions 73,4% 66,2% 72,0% 70,1% 74,0% 55,1% 68,5% 78,3%
Return on Asset 9,9% 10,2% 5,7% 22,3% 9,6% 20,2% 13,0% 5,8%
Debt Interest Rate 2,8% 2,0% 2,5% 1,8% 0,6% 2,0% 1,9% 2,2%
Risk Buffer 7,1% 8,2% 3,3% 20,5% 8,9% 18,2% 11,0% 3,6%
¹ 2005 years industry median from UC AB is the median for companies with at least 20 employees in
industry 60240, i.e. road freight of goods.
50