Content area
Full Text
Abstract
This paper examines empirically the relevance of the pecking order theory to explain capital structure determinants of Swedish SMEs within different industries. The study is based on multiple regression models and employs panel data for 9082 Swedish SMEs for three financial years from 2002 to 2005. The models include the main capital structure determinants identified in capital structure literature. Generally, the empirical findings show that size, profitability, and risk are important determinants of both the long- and short-term debt of SMEs within all industry sectors. The effect of age and tangibility on long- and short-term debt is unstable and shifting, depending to a great extent on industry affiliation. Growth has significant influence on long- and short-term debt of firms only within a few industry sectors. The findings indicate that the pecking order theory appears to be relevant to explain the capital structures of Swedish SMEs.
Key words: Capital structure, SMEs finance, Pecking order theory, Industry.
Introduction
According to the literature, small and medium-sized firms (SMEs) face different financing challenges from those faced by large firms (Welsch and White 1981; Berger and Udell 1998; Scherr and Hulburt 2001). One reason is that SMEs in general demonstrate higher earnings volatility and failure rates than larger firms. Furthermore, they also have shorter asset maturities, and occupy different industry sectors and greater growth opportunities than larger firms (Scherr and Hulburt 2001). Berger and Udell (1998) believe that SMEs' access to external financial resources is influenced by three problems related to information asymmetry: high verification costs, adverse selection, and moral hazard. Therefore, previous research has implied that SMEs' capital structures are generally different from those of large firms (Welsh and White 1981; Van der Wijst 1989; Uzzi and Gillespie 1999).
Accordingly, traditional capital structure theories such as the Modigliani-Miller theory are generally not applicable to SMEs. Pecking order theory is actually a response to the problem of financing SMEs; it is based on the assumption that the owners/managers of SMEs are better informed about the firm than outside investors. The theory implies that in order to avoid this adverse selection, agency and signaling problem, owner-managers prefer to finance their firms, first of all, by retained earnings. Where internal financial sources are not sufficient, they choose favor debt...