Determinants of the capital structure of small and medium sized Brazilian enterprises

Abstract

This research investigates the determinants of the capital structure of small and medium enterprises (SMEs) using a unique database that includes over 19,000 Brazilian firms and spans 13 years of data. The econometric analysis employs the System Generalized Method of Moments estimator (GMM-Sys) and two strong results emerge: (a) profitability is negatively related to leverage, and (b) asset growth is positively related to leverage. Both results are consistent with the pecking order theory of capital structure and suggest that SMEs tend to finance their expansion with debt only after exhausting their internal resources. Additionally, we find weaker evidence for the following: (a) size is positively related to leverage, which can be interpreted as evidence that larger firms have more access to credit markets; (b) riskier SMEs tend to be less financially leveraged, consistent with the bankruptcy cost arguments from trade-off theories; and (c) the age of the firm is negatively related to financial leverage, suggesting that older SMEs may be slightly more conservative in their financing choices. Finally, the magnitude of the coefficient of lagged leverage shows the high persistence of this variable and is compatible with the hypothesis that SMEs adjust their debt/equity ratio towards a target value, although at a low speed.

The Determinants of Capital Structure for Malaysian Food Producing Companies

“…The result shows that profitability has negative relationship with leverage and growth has positive relationship with leverage, consistent with pecking order theory (Forte, Barros and Nakamura, 2013). Size is positively related to leverage, risker firms tends to have less leverage and age negatively related to leverage (Forte, Barros and Nakamura, 2013). The result is similar with Tongkong (2012) and Moosa, Li and Naughton (2011) researches.…”

“…There are numerous studies conducted on capital structure determinants in developed countries, quite a lot of studies done in developing and emerging countries and also a few researches conducted comparing developed and developing countries determination of capital structure. Serrasqueiro (2011) did research on Portuguese small and medium sized enterprise; Upneja and Dalbor (2001) on restaurant industry; Coleman (2006) on small manufacturing companies; Forte, Barros and Nakamura (2013) on Brazilian small and medium enterprises; Owolabi and Inyang (2012) on Nigerian manufacturing firms; Mishra (2011) on Indian manufacture companies; Qureshi and Azid (2006) on public and private sector; Tongkong (2012) on Thai real estate listed companies; Pertiwi and Anggono (2013) on Indonesian food and beverages companies and Akhbar and Ahmad Bhutto (2012) on Pakistani food and personal care industry.…”

The Determinants of Capital Structure: Evidence from Selected Listed Companies in Sri Lanka

“…Noulas and Genimakis (2011), Mei qiu and Bo la (2010), and Mallikarjunappa and Goveas (2007) said that firm size is an insignificant determinant of capital structure choice. However, empirical studies have found mixed results of the effect of firm size on capital structure, for example, Wald (1999), Wiwattanakantang (1999), Santi (2003), Bayrakdaroglu et al (2013) and Forte et al (2013) showed a positive sign for the association between the firm size and leverage ratios. Though, the studies by Titman and Wessels (1988), Ooi (1999) observe negative association between the firm size and leverage.…”

“…Thus, they can obtain more leverage to exploit the tax-shield advantage of debt (Forte et al, 2013). Titman and Wessels (1988) have reported that there is no effect on debt ratios occurring from Non-debt tax shields.…”

Investigating the Impact of Firm Characteristics on Capital Structure of Quoted and Unquoted SMEs

“…Previously, Sanchez-Vidal and Martin-Ugedo (2012) concluded that younger SMEs were utilizing more short term debt than the older when they tested a sample of around 6,000 small and medium firms in Spain. Similarly, Forte et al (2013) examined the capital structure of more than four thousand SMEs in Brazil, extracted from unbalancing panel data. They confirmed the negative correlation between the leverage and age.…”