Capital structure, Financial growth cycle, Financing decisions, Small and medium-sized firms, Source of finance, G30, G32,

This paper explains both capital-structure and debt-maturity choices for SMEs in terms of institutional differences at the local level, making use of regions as the unit of analysis. Specifically, the article considers local financial development and the effectiveness of the local enforcement system, controlling for firm-specific characteristics. The ability of the local financial market to provide funds efficiently is of particular interest to SMEs, due to the fact that large firms can tolerate imperfections in the local financial system by moving to international, more highly integrated financial markets. The main findings of the analysis suggest that capital-structure and debt-maturity choices interact as complementary factors and that corporate financial decisions are not only the result of firm-specific or industry-specific characteristics, but are also based on the institutional climate in which a firm operates. After controlling for heterogeneity in firm characteristics, leverage was found to be positively influenced by local financial development, while the enforcement system was less relevant. Conversely, debt maturity was longer in regions with high levels of law enforcement, whereas local financial development did not play a relevant role.

Previous empirical financial studies have paid little attention to the role of diversification strategy on financial choices. This study analyses the financing strategies of multibusiness firms, suggesting the relevance of sorting the diversification phenomena into its related and unrelated components. The implications of our findings are important because they explain earlier contradictory results on capital-structure determinants and offer an explanation of how the degree of product specialization/diversification and the direction of diversification (related or unrelated) translate into different corporate financial behaviours. Copyright (c) The Authors. Journal compilation (c) 2009 AFAANZ.

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