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The Impact of Firm and Industry Characteristics on Small Firms' Capital Structure: Evidence from Dutch Panel Data

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  • Degryse, H.A.
  • Goeij, P. C. de
  • Kappert, P.

    (Tilburg University, Center for Economic Research)

Abstract

We investigate small firms’ capital structure, employing a proprietary database containing financial statements of Dutch small and medium-sized enterprises (SMEs) from 2003 to 2005. We find that the capital structure decision of Dutch SMEs is consistent with the pecking order theory: SMEs use profits to reduce their debt level, and growing firms increase their debt position since they need more funds. Furthermore, we document that profits reduce in particular short term debt, whereas growth increases long term debt. This implies that when internal funds are depleted, long term debt is next in the pecking order. We also find evidence for the maturity matching principle in SME capital structure: long term assets are financed with long term debt, while short term assets are financed with short tem debt. This implies that the maturity structure of debt is an instrument for lenders to deal with problems of asymmetric information. Finally, we find that SME capital structure varies across industries but firm characteristics are more important than industry characteristics.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2009-21.

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Date of creation: 2009
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Handle: RePEc:dgr:kubcen:200921

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Web page: http://center.uvt.nl

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Keywords: Capital Structure; SMEs; pecking order theory; trade-off theory;

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  17. Gavin Cassar & Scott Holmes, 2003. "Capital structure and financing of SMEs: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 43(2), pages 123-147.
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