The Low Leverage Decisions of Knowledge based Firms - An empirical study of the impact of employees' risk preferences on the firm's capital structure decisions

摘要

A distinctive trait of knowledge-based companies is their dependency on the competence andcontribution of their employees. They are commonly structured as partnership firms and tend tohave a low amount of tangible assets and virtually no debt. Although theories within capitalstructure state that debt can indeed be beneficial, knowledge-based companies persistentlychoose to completely avoid the use of long-term debt and hence do not adequately fit thedescription of any of the dominant theories within the field.The aim of this thesis is to analyse and explain the process behind the capital structure decisionsof knowledge-based firms. The main purpose is to see how well these companies align to themajor theories within the field and seek further explanations in alternative theories where theformer do not suffice. Moreover, due to the nature of the firm’s assets an interesting aspect toinvestigate further is whether the risk preferences of the firm’s employees affect the firmsfinancing decisions. The emphasis is put on partners’ ability to impact decisions as they havedecision-making authority and incentives to maximise profitability, gaining rewards in the form ofsubstantial yearly dividend payments.The study was performed with the use of a qualitative method, which enables a profoundunderstanding of what affects decisions. Primary data was collected through interviews withrepresentatives of four knowledge-based firms operating in the fields of law, consulting andadvertising, which were deemed to provide a broad and fair view of the industry. We sought tointerview employees that had great insight in the companies’ finances; therefore the interviewswere conducted with either the Chief Financial Officer or Chief Executive Officer of therespective firms in order to gain as high reliability as possible.The study showed that the main reason for avoidance of debt was most often referred to theinterviewed companies’ low investment needs. Moreover, theories in the area were found not tobe actively considered, even though evidence in favour of them can be found. Much of thefindings aligned with the implications of the pecking order theory, but even so the extremepolicies of knowledge-based need more explaining. In line with the stakeholder co-investmenttheory the thesis investigates whether the risk preferences of the firms’ employees, in being themost important stakeholder, in any way affect decision-making. It was found that even thoughnot explicitly expressed, many times decisions are made that favour the employees over theoverall financial benefit of the firm. Rather than increasing the market value of the company bytaking on debt, dividend-payouts create value-enhancing activities on a personal level.