MSME Financing Behavior—Systematic Literature Review of MSME’s Capital Structure Financing

The aim of this research paper is to examine the MSME’s capital structure financing patterns. To analyse the same we have first focused on famous capital structure theories and then we have analyzed total 54 papers spanning from 1999 till 2022 basis the Scopus Database and the literatures obtained on “Google Scholar” as per the Search Engine Optimization results. We have also detailed the most used “Dependent variables” and “Independent variables” as per our analysis. The analysis and rationale of expected sign (positive/negative) of the Independent variable’s basis the most relevant theories i.e. either PoT (Pecking order theory) or ToT (Trade off theory) has also been done. As per our analysis of the research papers we have come to a conclusion that debt is a significant source of funding for MSMEs and the ‘pecking order’ notion has frequently been validated by research findings. As the MSME firms lacks in collateral and in Indian scenario where trust factors between Lenders and Borrowers are not as much as in Developed countries and considering the fact that MSMEs are closely knitted firms with negligible difference between managers and Promoters, we expect that MSMEs would first try to manage the funds internally and then will look for Borrowing and as a last resort equity financing given the fact that due to large “Information Asymmetry” the cost of equity financing is higher than the Debt finance. So, it is likely that the “Pecking order theory” would be validated in Indian context.