Determinants of the Capital Structure of Small and Medium Sized Brazilian Enterprises

Brazilian Administrative Review, Vol. 10, No. 3, Art. 6, pp. 347-369, July/September 2013

Brazilian Electronic Journal of Economics, Forthcoming

23 Pages Posted: 3 Aug 2013 Last revised: 1 Nov 2016

See all articles by Denis Forte

Denis Forte

Mackenzie

Lucas Ayres B. de C. Barros

University of Sao Paulo

Wilson Toshiro Nakamura

Mackenzie Presbiterian University - PPGAE

Date Written: February 21, 2013

Abstract

This research investigates the determinants of the capital structure of small and medium enterprises (SMEs) using a unique database that includes over 19,000 Brazilian firms and spans 13 years of data. The econometric analysis employs the System Generalized Method of Moments estimator (GMM-Sys) and two strong results emerge: (a) profitability is negatively related to leverage, and (b) asset growth is positively related to leverage. Both results are consistent with the pecking order theory of capital structure and suggest that SMEs tend to finance their expansion with debt only after exhausting their internal resources. Additionally, we find weaker evidence for the following: (a) size is positively related to leverage, which can be interpreted as evidence that larger firms have more access to credit markets; (b) riskier SMEs tend to be less financially leveraged, consistent with the bankruptcy cost arguments from trade-off theories; and (c) the age of the firm is negatively related to financial leverage, suggesting that older SMEs may be slightly more conservative in their financing choices.

Finally, the magnitude of the coefficient of lagged leverage shows the high persistence of this variable and is compatible with the hypothesis that SMEs adjust their debt/equity ratio towards a target value, although at a low speed.

Keywords: small and medium enterprises (SMEs), capital structure, leverage, corporate finance

JEL Classification: G30, G31, G34, D21

Suggested Citation

Forte, Denis and Barros, Lucas Ayres Barreira de Campos and Nakamura, Wilson Toshiro, Determinants of the Capital Structure of Small and Medium Sized Brazilian Enterprises (February 21, 2013). Brazilian Administrative Review, Vol. 10, No. 3, Art. 6, pp. 347-369, July/September 2013, Brazilian Electronic Journal of Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2304678

Denis Forte (Contact Author)

Mackenzie ( email )

Rua da Consolação 920
São Paulo, 010302907
Brazil

HOME PAGE: http://up.mackenzie.br/stricto-sensu/administracao-de-empresas/corpo-docente/

Lucas Ayres Barreira de Campos Barros

University of Sao Paulo ( email )

Avenida Professor Luciano Gualberto, 908
São Paulo, São Paulo 05508-010
Brazil

Wilson Toshiro Nakamura

Mackenzie Presbiterian University - PPGAE ( email )

Rua da Consolacao, 896 - 5o. andar
01302-907 Sao Paulo
Brazil
+55 11 236 8669 (Phone)
+55 11 236 8600 (Fax)

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