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How does Financial Distress Affect Small Firms’ Financial Structure?

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  • Julio Pindado

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  • Luis Rodrigues
  • Chabela Torre

Abstract

This paper provides new evidence on the financial structure of small firms by emphasizing the role played by financial distress. We specify a model of debt adjustments that allows us to investigate the specific nature of the adjustment process towards target debt levels in small firms, which is then extended to account for the effect of financial distress on financial structure decisions. Our models were estimated by the Generalized Method of Moments on a data panel of small Portuguese firms during a period of recession, in which a substantial proportion of the companies analyzed faced a financial distress situation. We find that small firms do adjust their debt ratios towards target levels, the speed of adjustment being faster in the shorter term. Our results also indicate that there are major differences in the determinants of long-term and short-term debt, highlighting the role played by debt maturity in explaining a firm’s financial structure. Finally, random behavior is observed in financially distressed firms, who seem to be disoriented when making their financial structure decisions. Copyright Springer 2006

Suggested Citation

  • Julio Pindado & Luis Rodrigues & Chabela Torre, 2006. "How does Financial Distress Affect Small Firms’ Financial Structure?," Small Business Economics, Springer, vol. 26(4), pages 377-391, May.
  • Handle: RePEc:kap:sbusec:v:26:y:2006:i:4:p:377-391
    DOI: 10.1007/s11187-005-4845-8
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    References listed on IDEAS

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    Cited by:

    1. Mustafa Caglayan & Oleksandr Talavera & Lin Xiong & Jing Zhang, 2019. "What does not kill us makes us stronger: the story of repetitive consumer loan applications," Discussion Papers 19-01, Department of Economics, University of Birmingham.
    2. Campa, Domenico & Camacho-Miñano, María-del-Mar, 2015. "The impact of SME’s pre-bankruptcy financial distress on earnings management tools," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 222-234.
    3. Dries Heyman & Marc Deloof & Hubert Ooghe, 2008. "The Financial Structure of Private Held Belgian Firms," Small Business Economics, Springer, vol. 30(3), pages 301-313, March.
    4. Mac an Bhaird, Ciarán & Vidal, Javier Sanchez & Lucey, Brian, 2016. "Discouraged borrowers: Evidence for Eurozone SMEs," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 46-55.
    5. Tom Caneghem & Geert Campenhout, 2012. "Quantity and quality of information and SME financial structure," Small Business Economics, Springer, vol. 39(2), pages 341-358, September.
    6. Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.
    7. Joaquim J.S. Ramalho & Jacinto Vidigal da Silva, 2009. "A two-part fractional regression model for the financial leverage decisions of micro, small, medium and large firms," Quantitative Finance, Taylor & Francis Journals, vol. 9(5), pages 621-636.
    8. Geert Campenhout & Tom Caneghem, 2013. "How did the notional interest deduction affect Belgian SMEs’ capital structure?," Small Business Economics, Springer, vol. 40(2), pages 351-373, February.
    9. Van Campenhout, Geert & Van Caneghem, Tom, 2009. "Information Availability, Information Quality and the Financial Structure of Belgian SME's," Working Papers 2009/27, Hogeschool-Universiteit Brussel, Faculteit Economie en Management.
    10. Julio Pindado & Ignacio Requejo & Juan C. Rivera, 2020. "Does money supply shape corporate capital structure? International evidence from a panel data analysis," The European Journal of Finance, Taylor & Francis Journals, vol. 26(6), pages 554-584, April.

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    More about this item

    Keywords

    Financial distress; financial structure; adjustment model; panel data; G32; G33;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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