Small Business Economics

, Volume 12, Issue 2, pp 113–130

Financial Policy and Capital Structure Choice in U.K. SMEs: Empirical Evidence from Company Panel Data


  • Nicos Michaelas
    • Business Development Centre, Manchester Business School
  • Francis Chittenden
    • Business Development Centre, Manchester Business School
  • Panikkos Poutziouris
    • Business Development Centre, Manchester Business School

DOI: 10.1023/A:1008010724051

Cite this article as:
Michaelas, N., Chittenden, F. & Poutziouris, P. Small Business Economics (1999) 12: 113. doi:10.1023/A:1008010724051


This article utilises up-to-date financial panel data, and investigates the capital structure of small and medium sized enterprises (SMEs) in the U.K. Different capital structure theories are reviewed in order to formulate testable propositions concerning the levels of debt in small businesses, and a number of regression models are developed to test the hypotheses.

The results suggest that most of the determinants of capital structure presented by the theory of finance appear indeed to be relevant for the U.K. small business sector. Size, age, profitability, growth and future growth opportunities, operating risk, asset structure, stock turnover and net debtors all seem to have an effect on the level of both the short and long term debt in small firms. Furthermore, the paper provides evidence which suggest that the capital structure of small firms is time and industry dependent. The results indicate that time and industry specific effects influence the maturity structure of debt raised by SMEs. In general terms, average short term debt ratios in SMEs appear to be increasing during periods of economic recession and decrease as the economic conditions in the marketplace improve. On the other hand, average long term debt ratios exhibit a positive relationship with changes in economic growth.

Copyright information

© Kluwer Academic Publishers 1999