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THE EFFECT OF FIRM SIZE ON SME's CAPITAL STRUCTURE

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  • Martina Harc

    (Croatian Academy of Sciences and Arts Institute for Scientific research and Artistic Work in Osijek)

Abstract

One of the key determinants of leverage is firm size. Larger firms are usually more established in their markets, diversified and less likely to fail. Therefore, it has been argued that size can be seen as an inverse measure of bankruptcy risk. The aim of this paper is to investigate the relationship between firm size and the capital structure of Croatian small and medium-sized enterprises. Most of previous studies have shown a positive relationship between firm size and leverage. But, several empirical studies found negative relationship between firm size and leverage. This study has been conducted on a sample of 500 Croatian SMEs for the period between 2005 and 2010. The data used for the empirical analysis were taken from companies annual reports. The Pearson Correlation Coefficient is applied in order to examine the relationship between firm size and leverage measures. The results of this research indicate negative relationship between firm size and leverage. But, firm size differently affect short-term and long-term leverage. The relationship between firm size and short-term leverage is negative but not statistically significant in all observed years. The relationship between firm size and long-term leverage is positive in all observed years but is not statistically significant, except one year. These results suggests that larger Croatian SME's are mostly more profitable and use more retained earnings to finance their business. This finding is consistent with the packing order theory which predicts a negative relationship between firm size and the leverage.

Suggested Citation

  • Martina Harc, 2015. "THE EFFECT OF FIRM SIZE ON SME's CAPITAL STRUCTURE," Economy of eastern Croatia yesterday, today, tommorow, Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Croatia, vol. 4, pages 315-324.
    • Handle: RePEc:osi:eecytt:v:4:y:2015:p:315-324
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