Capital Structures Around the World: Are Small and Private Firms Different?
36 Pages Posted: 14 Mar 2010
Date Written: March 2010
We examine the determinants of capital structure decisions of firms, specifically small and private firms in developing countries. We use survey data for 25 countries from World Bank Enterprise Survey which is not used before. About 90 percent of private firms and about 70 of listed firms in our sample are small and medium sized. We show that the determinants of capital structure decisions of small and large firms and private and listed companies are different. Leverage and debt maturities are lower for private and small firms despite their high asset tangibility and profitability ratios. We attribute this to the economic environment of the country. Leverage increases as profitability and size increases at firm level and as economic growth rates and income increase at the economy level. Debt maturity increases as asset tangibility increases at firm level and cost of borrowing declines at the economy level. Our results are robust to the different definitions of size. Firm level determinants of capital structure are the same for small and large firms as well as for listed and private firms. The difference is in sensitivity to economic variables. Small firms’ and private companies’ capital structure and term maturity decisions are sensitive to the economic environment while large and listed firms’ are not. The economic environment of the country is more important for small and private firms than for large and listed firms in their capital structure decisions.
Keywords: Leverage, debt maturity, small firms, private firms
JEL Classification: G3, G32, F30
Suggested Citation: Suggested Citation