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Debt financing and firm performance: an empirical study based on Swedish data

Author

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  • Darush Yazdanfar
  • Peter Öhman

Abstract

Purpose - – The purpose of this study is to examine the relationship between debt level and performance among small and medium-sized enterprises (SMEs). Design/methodology/approach - – Unlike the vast majority of previous research, this study uses three-stage least squares (3SLS) and fixed-effects models to analyse a comprehensive, cross-sectoral sample of 15,897 Swedish SMEs operating in five industry sectors during the 2009-2012 period. Findings - – This study confirms that debt ratios, in terms of trade credit, short-term debt and long-term debt, negatively affect firm performance in terms of profitability. As a high debt ratio seems to increase the agency costs and the risk of losing control of the firm, SME owners and managers tend to finance their businesses with equity capital to a fairly high degree. Practical implications - – As debt policy significantly influences firm performance, and thereby firm value and survival, SME owners and managers should focus on finding a satisfactory debt level. Originality/value - – To the authors’ best knowledge, this study is among the first to use 3SLS and fixed-effects models to analyse the relationship between debt level and firm performance. Moreover, while most previous research has examined listed firms, this study highlights the issue among SMEs, which play a fundamental role in the economy.

Suggested Citation

  • Darush Yazdanfar & Peter Öhman, 2015. "Debt financing and firm performance: an empirical study based on Swedish data," Journal of Risk Finance, Emerald Group Publishing Limited, vol. 16(1), pages 102-118, January.
    • Handle: RePEc:eme:jrfpps:jrf-06-2014-0085
    DOI: 10.1108/JRF-06-2014-0085
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    Citations

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    Cited by:

    1. Andrew E. Hansen-Addy & Davide M. Parrilli & Ishmael Tingbani, 2024. "The impact of trade facilitation on African SMEs’ performance," Small Business Economics, Springer, vol. 62(1), pages 105-131, January.
    2. Amare Abawa Esubalew & A. Raghurama, 2021. "The moderating effect of size on the relationship between commercial banks financing and the performance of micro, small, and medium enterprises (MSMEs)," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 11(1), pages 1-14, December.
    3. Luxing Liu & Keyu Lei & Hong Jin & Yin-Pei Teng, 2023. "R&D Investment, Executive Incentive, and Financial Performance in GEM: Based on Three-Stage Least Squares Method," SAGE Open, , vol. 13(4), pages 21582440231, November.

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