Determinants of capital structure: New evidence from Portuguese small firms

Abstract

This paper studies the determinants of capital structure of 2,329 Portuguese small firms, decomposing total liabilities in long and short-term debt. The results of 2007-2011 panel data suggest that information asymmetry and agency problems seem to be important for small firms in accessing long-term debt. Greater size and a higher level of collateral are quite important in accessing long-term debt. Liquidity is positively associated with long-term debt, although it is negatively related to short-term debt. Higher profitability is related to lower levels of debt. When internal finance is insufficient, these firms seem to be strongly dependent on short-term debt, due to the difficulties in accessing long-term. The main conclusion of the current study is that the predicitons of POT and TOT are followed by small firms in their capital structure, which is in accordance with the results of previous studies focusing on SMEs.Keywords: capital structure; panel data models; small firms. ResumoNeste trabalho, analisamos os determinantes do endividamento das pequenas empresas portuguesas, utilizando os modelos de dados em painel e decompondo a dívida em médio/longo prazo e curto prazo. Os resultados obtidos sugerem que a informação assimétrica e os problemas de agência influenciam o acesso à dívida de longo prazo por parte destas empresas, assim como a dimensão e o nível de colateral. A liquidez está positivamente associada com a dívida de longo prazo e negativamente com a de curto prazo. Maior rendibilidade está relacionada com menor endividamento. Quando os fundos internos são insuficientes, as empresas parecem estar fortemente dependentes da dívida de curto prazo, dadas as dificuldades no acesso à de longo prazo. A principal conclusão deste trabalho é a de que os pressupostos da pecking-order theory e da trade-off theory se aplicam à estrutura de capital das pequenas portuguesas, o que está de acordo com os resultados obtidos em estudos anteriores sobre PME.Palavras-chave: estrutura de capital; dados em painel; pequenas empresas.

Efficiency and Capital Structure in Portuguese SMEs

“…Profitability (pre-interest and pre-tax operating surplus divided by total assets) should be negatively correlated with leverage in accordance with POT [34,53], because profitable firms will finance their investments with internal funds and move to external finance only when internal funding is insufficient. Still based on TOT and contracting cost theories we can predict a positive relation between profitability and leverage because the most profitable firms have greater debt capacity, and may take advantage of debt tax-shields [53].…”

“…Firm size (measured by the logarithm of the firm's sales) is expected to be positively related to leverage in accordance to TOT [34,43,48,53,63]. However, the firm's size may be also negatively correlated with leverage since "size may act as a proxy for the information outside investors have, and that informational asymmetries are lower for large firms which implies that large firms should be in a better position to issue informationally sensitive securities such as equity rather than debt."…”

“…[34, p. 1456]. Also Michaelas et al [36] and Serrasqueiro et al [53] pointed out that problems of asymmetric information and moral hazard will be greater for small firms, because of the lack of financial disclosure and their owner-managed nature. Therefore, lenders will be unwilling to lend long-term to small firms on favorable terms (higher long-term debt cost) and therefore, SMEs tend to issue short-term debt to overcome those problems.…”

“…Therefore, lenders will be unwilling to lend long-term to small firms on favorable terms (higher long-term debt cost) and therefore, SMEs tend to issue short-term debt to overcome those problems. Consequently, small firms frequently have a higher level of short-term debt than larger firms [53]. Seelanatha [50] used a panel data analysis to estimate the radial technical efficiency scores of Chinese firms from different industries and then considered the impact of a firm's relative efficiency, market share and industry concentration on capital structure decisions.…”

“…Asset tangibility (measured by the ratio of fixed tangible assets to total assets) should be positively correlated to leverage, as tangible assets can be used as collateral and mitigate problems of information asymmetry [23,34,53]. However some empirical studies have found negative correlation with short-term debt ratios [61].…”