Small vs Large Firms Leverage: Determinants and Structural Relations

Abstract

The aim of this paper is to examine the importance of the different theoretical proposals that explain a firm's capital structure in relation to the existence of an optimal debt ratio, the preference of the firm for internal financing and the consideration of financial constraints. The contrast of the relative importance of these theoretical proposals is carried out from a structural equation model on the database of the Encuesta de Estrategias Empresariales (Business Strategies Survey) for Spanish firms in 1998. The results of the contrast from the structural equation model reveal a greater importance in financial constraints as determinants of capital structure, in the sense that small firms together with firms not belonging to any business group, recently created firms and those with a smaller market share have less possibility of deferring required investments and leverage. With a similar importance between them, the preference for internal financing and the average debt ratio of the sector are also capital structure determinants.

Keywords: Capital Structure, Small Firms, Size, Pecking Order, Tradeoff, Financial Constraints, Structural Equations Model

JEL Classification: G32