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Sources of Capital and Debt Structure in Small Firms

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  • Chenchuramaiah T. Bathala

    (Cleveland State University)

  • Oswald D. Bowlin

    (Texas Tech University)

  • William P. Dukes

    (Texas Tech University)

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    Abstract

    In this paper we examine the relationship between ownership differences and small firms’ financial policies using a survey of U.S. companies. The study finds that financial policies differ according to the type of ownership (private versus public) and by the ownership differences (family-owned, closely-held, or widely-held) within the private firms. The differences are in the ownership concentration, relative importance of various sources of capital, debt characteristics (sources of debt financing, debt maturity, and debt cost). A multiple regression equation estimated in the paper provides evidence relating to cross-sectional variations in debt ratios of small firms. The paper offers information asymmetry, illiquidity, and agency cost explanations for the observed differences in ownership and financial policies of small firms.

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    Bibliographic Info

    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Entrepreneurial Finance and Business Ventures.

    Volume (Year): 9 (2004)
    Issue (Month): 1 (Spring)
    Pages: 29-50

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    Handle: RePEc:pep:journl:v:9:y:2004:i:1:p:29-50

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    Web page: http://bschool.pepperdine.edu/jef
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    Related research

    Keywords: Capital Sources; Access to Capital; Small Business; Small Firm;

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    References

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    1. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
    2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    3. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
    4. Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.
    5. Chenchuramaiah T. Bathala & Oswald D. Bowlin & William P. Dukes, 2003. "Corporate Governance, Illiquidity, and Valuation Issues in Privately-Owned Corporations," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 8(1), pages 1-30, Spring.
    6. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
    9. Cook, Lisa D., 1999. "Trade credit and bank finance: Financing small firms in russia," Journal of Business Venturing, Elsevier, vol. 14(5-6), pages 493-518.
    10. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
    11. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    12. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
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