The Role of Uncertainty: Geopolitical Risk's Effect on Target Debt Ratios Among Nordic Public Firms

Sammanfattning

Inspired by the escalation in geopolitical risk following Russia's invasion of Ukraine, this thesis examines how geopolitical risk affects the target debt ratios of publicly listed Nordic firms, and whether this effect is stronger for firms with direct exposure to Russia. Using panel data on 1,387 publicly listed Nordic firms from 2018-2024 and the geopolitical risk index developed by Caldara and Iacoviello (2022), we estimate a dynamic partial-adjustment model with firm fixed effects to examine how geopolitical risk influences firms' target debt ratios. Our results show a positive and significant relationship between geopolitical risk and target debt ratios in the Nordic context. This opposes our hypothesis that increased geopolitical risk would lead firms to adopt more conservative capital structures. We also find no meaningful difference between exposed and non-exposed firms, suggesting that the relationship between geopolitical risk and target debt ratios does not appear to be driven by firm-specific exposure to Russia.