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Financial Constraints and Leverage Decisions in Small and Medium-Sized Firms

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  • Harshana Kasseeah

Abstract

This paper studies the leverage decisions of small and medium-sized manufacturing firms in the UK. The relationship between debt and cash flow is studied in the light of both internal and overall financial constraints. Internal financial constraints are defined as those constraints internal to the firm that influence its financing decisions. These measures include the cash flow and profitability of the firm. Overall financial constraints account for both internal financial constraints and external financial constraints, which in turn are accounted for by conventionally used measures of financial constraints such as the size of the firm measured by the real assets and the riskiness of the firm. Results obtained indicate that firms follow a financial hierarchy when deciding what sources of finance to use. Internal financial constraints measured by the availability of internal funds are important factors that affect the relationship between debt and cash flow.

Suggested Citation

  • Harshana Kasseeah, 2012. "Financial Constraints and Leverage Decisions in Small and Medium-Sized Firms," Journal of Economics and Behavioral Studies, AMH International, vol. 4(1), pages 55-65, January.
    • Handle: RePEc:rnd:arjebs:v:4:y:2012:i:1:id:2377
    DOI: 10.22610/jebs.v4i1.302
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