Efficiency and Capital Structure in Portuguese SMEs

Abstract

This paper aims to analyse the bi-directional relationship between technical efficiency, as a measure of companies' performance, and capital structure, under the agency cost theory as well as the pecking order and trade-off theory, to explain the capital structure decisions. The technical efficiency was estimated by the DEA method and corrected by using a suitable bootstrap to obtain statistical inferences. To test the agency cost hypothesis, asymmetric information hypothesis, risk-efficiency hypothesis and franchise value hypothesis (under pecking order and trade off theories framework), two models were applied using some determinants of capital structure such as size, profitability, tangibility, liquidity as control and explanatory variables through a truncated regression with bootstrapping. From an initial sample of 1024 small and medium sized companies from the interior of Portugal, for the period 2006-2009, a subsample of 210 SMEs from secondary and tertiary sectors was selected. The results suggest that medium sized companies have higher average bias-corrected efficiency than small companies; that short-term leverage is

Efficiency and Determinants of Capital Structure in the Greek Pharmaceutical, Cosmetic and Detergent Industries

“…In recent years, researchers have focused their attention on capital structure and firm performance using frontier methods to measure firm efficiency. Among the notable studies, there are DEA Psillaki 2007, 2010;Mok et al 2007;Seelanatha 2010;Kapelko and Lansink 2015;She and Guo 2018;Fernandes et al 2018;Gadanakis et al 2020) and SFA works (Weill 2008;Cheng and Tzeng 2011;Hanousek et al 2015;Shaik 2015;Guo et al 2021).…”

“…She and Guo (2018) studied a sample of global e-retail firms using panel data and found them to be consistent with POT, a negative relationship between firm performance and leverage. Fernandes et al (2018) analyzed the bi-directional relationship between technical efficiency and capital structure for a sample of Portuguese small-sized enterprises. Gadanakis et al (2020) used double-bootstrapped DEA to investigate the relationship between efficiency and capital structure for the Italian cereal farms.…”

“…The logarithm of a company's revenue (sales) is used to calculate its size. Size is expected to be positively related to leverage according to TOT since larger enterprises are more diversified and fail less frequently than smaller enterprises (Fernandes et al 2018).…”

“…Because of asymmetric information and agency costs, lenders may be compelled to require assurances in the form of collateral. As a result, asset tangibility is assumed to be positively linked to debt (Fernandes et al 2018).…”

“…According to POT, profitability should be negatively associated with leverage, since profitable companies would finance their investments with internal funds first, and then turn to external financing when internal funding is inadequate. Because the most profitable companies have larger debt potential and can benefit from debt tax-shields, TOT can predict a positive association between profitability and leverage (Fernandes et al 2018).…”