How Does Financial Distress Affect Small Firms' Financial Structure?
Posted: 10 Nov 2009
Date Written: 2006
The impact of economic distress on the financialstructure decisions of an industry has been under-investigated in the businessliterature.This research investigates the impact of the Portugueserecession of the early and mid 1990s on the financial structure decisions ofbusinesses within the clothing, textile, and footwear industries. Theseindustries include many small firms, and are especially affected byinternational price competition. Utilizing a generalized method of moments (GMM), partial adjustment modelsare proposed to examine the impact of financial distress on financial structuredecisions.Financial data for 402 small businesses, for 6 to 8 yearsbetween 1990 and 1997,were collected from both the Central Balance-SheetOffice and the Central Risk Office of the Banco de Portugal. Two major findings emerged from the analysis of capital structurechoices:First, significant differences exist between the determinants oflong-term and short-term debt ratios in small firms.Long-term debt isoften chosen following consideration of both tax benefits and ex-anteinsolvency costs; short-term debt is positively impacted by growth butnegatively correlated with earnings.The second finding indicates thatsmall distressed firms appear to be completely disoriented regarding financialstructure decision-making, indicating they follow no specific debt adjustmentpolicy. (AKP)
Keywords: Long term debt, Financial strategies, Recessions, Financial constraints, Access to capital, Clothing industry, Debt, Financial management, Debt financing, Capital structure, Taxes, Textile industry
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