Capital Structure of SMEs: To What Extent Does Size Matter?

Abstract

The subject of the capital structure decision of firms has been thoroughly studied both theoretically and empirically. This paper adds to the existing literature by examining a number of hypotheses relating to the capital structure decision in relation to the firms’ size, namely by distinguishing among micro, small and medium firms. We test the hypothesis that the factors determining capital structure are different for firms belonging to different size groups. We use a panel data model capturing the dynamic concept of capital structure. We find that whereas the size of the firm does affect how much debt a firm will issue, it does not influence the relationship between the other regressors and debt usage. Thus, firms belonging to different size groups seem to behave similarly regarding the relationship between the debt they use and their profitability, size, asset structure and growth.

Keywords: Capital structure, micro, small and medium firms

JEL Classification: G32, C51