Abstract
This paper investigates the determinants of capital structure and use of financ-
ing for small and medium sized enterprises. Hypotheses utilising static trade-
off and pecking order arguments are empirically examined using a series of firm
characteristics including: size, asset structure, profitability, growth and risk.
The hypotheses developed are tested using a large Australian nationwide panel
survey. The results suggest that asset structure, profitability and growth are
important determinants of capital structure and financing. For asset structure
the direction of the influence is reliant upon the capital structure or financing
measure employed. The results generally support static trade-off and pecking
order arguments proposed by theoretical models.
Key words
: Capital structure; Financing; Small and medium sized enterprises
JEL classification
: G30, G35
1. Introduction
This paper investigates the determinants of capital structure and the use of
financing by Small and Medium sized Enterprises (SMEs). Financial theories
have been developed to explain capital structure, with empirical evidence based
upon large listed firms tending to support these theories. However, the question
as to the whether these arguments are valid for other firms, particularly smaller
firms, has received limited attention. The applicability of these financial theor-
ies, or their relative effects can be questioned when considering the influence of
various institutional settings and scale effects upon the cost or even availability
of financing alternatives.
Institutional differences in the types of financial organisations, their pre-
dominance and the traditional markets they serve, vary the way investment and
capital are allocated. For example, different investor groups may use different
criteria for evaluating financing decisions. Even across settings where similar
investor groups exist, the allocation decisions may differ due to regulatory
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