Life Cycle Theory of the Capital Structure: Evidence from Tunisian SMEs

Abstract

Empirical research on the financing of small and medium-sized enterprises (SMEs) has focused mainly on theoretical approaches related to hierarchical order and, to a lesser extent, on trade-off theory. However, the financial literature has recently revealed that the life-cycle stages of SMEs influence their financial choices, which may explain why business financing evolves over time. Thus, this paper used a panel data approach to study the impact of life cycle phases on the capital structure of 70 Tunisian industrial SMEs during the period from 2013 to 2016. We found that Tunisian SMEs tended to use debt more intensively in the short term, while long-term debt was rarely used. We also found that the life cycle theory is perfectly adapted to describe the financial behavior adopted by Tunisian SMEs, which tend to use debt (regardless of maturity) during the early life cycle phases. Once SMEs age and mature, other sources of funding take over (mainly self-financing and even an IPO). Contribution/ Originality:This study is one of very few to investigate the influence of life cycle phases on the capital structure for Tunisian SMEs. The paper's primary contribution is that each source of funding is often adapted to a specific moment in the life cycle of the SME. 1.In Tunisia and according to the National Institute of Statistics (NIS), is considered an SME, any company whose workforce varies between 6 and 199 employees.In addition, there is another definition of SME eligible for intervention by the Industrial Promotion and Decentralization Fund (IPDF), which defines SMEs in the industrial and service sector as those with a total investment not exceeding 10 million dinars (including working capital).

Determinants of Capital Structure Decision of Micro, Small and Medium Scale Entreprises (MSMES) in Selected South Western States, Nigeria

“…Empirical research has established that the funding decision of MSMEs is influenced by the life cycle stages, which explains why business finances have evolved over a period. explain the reason business financing has evolved over time (Walid, 2019). For the life cycle growth model, new businesses rely mainly on internal financing sources and the mature ones on the use of external financing, which will affect their growth and the accomplishment that can be achieved as a firm.…”

“…In addition, they are seen to have a better credit rating that will give them credibility with their lenders. Again, Walid (2019) studied SMEs in Tunisia. In order to examine the effect of life cycle stages on the 70 Tunisian Industrial SMEs' capital structure from 2013 to 2016, this study made use of a panel method of data analysis.…”

Entrepreneur characteristics and financing patterns in SMES of MENA countries: Overcoming the burdens of liability of newness

“…Second , tapping into organizational lifecycle (Churchill & Lewis, 1983; Dodge et al, 1994), these effects could be moderated by firm age. Although previous studies have investigated firm age effect on capital structure (Jadoua et & Mostapha, 2020; Mahmud & Akin, 2019; Youssef, 2019), they did not consider the interaction of life cycles with entrepreneurs' attributes. Inclusion of these attributes could explain the mixed findings of these studies.…”