Abstract
The aim of this paper is to analyse the speed of adjustment of small and medium-sized enterprises (SMEs) to the target leverage. By applying a system GMM technique to Spanish panel data collected during the period 1995–2005, we estimate a partial adjustment model in which both target leverage and speed of adjustment are simultaneously endogenized. We provide empirical evidence on the determinants of target leverage and the speed of adjustment. More specifically, the rate of financial flexibility, growth opportunities and size are positively related to the speed of adjustment, whereas the distance to the optimal ratio of debt shows a negative impact. Our findings demonstrate that, in terms of sample mean, a high percentage of Spanish SMEs adjust rationally to their target. Additionally, the SMEs analysed appeared to be over-levered and fairly motivated to adjust (annual adjustment speed: 26%).
Similar content being viewed by others
Notes
Since 1986 Spain has a second capital market (currently called “Alternative Stock Market”) aimed at small enterprises, although it has never worked very well. We presume that the high information costs of going public and the threat of losing control are at the core of the decision to enter the stock market.
In order to avoid the “mask” effect produced by own extreme values, mean and standard deviation have been calculated without considering the lowest and highest ten values (Becker and Gather 1999).
Small firms are defined as those having fewer than 50 employees and less than €10 million in sales or, alternatively, assets. Micro firms are those with fewer than ten employees and less than €5 million in sales or, alternatively, less than €2 million in assets.
The set of instruments includes all possible lag levels as instruments in the first-differenced equation (referred to t − 2 year and the previous years for the lagged dependent variable and t – 1 year and the previous years for all the explanatory variables of both leverage and adjustment speed). Additionally, we include the lagged first-differences (as to t − 1 year) as instruments in the equation in levels.
The factor default risk has also been proxied by the variable EBIT to interest costs, and the results remained the same (not reported).
We have also estimated Eq. (6) by considering the speed of adjustment as a fixed variable; the results remain the same (lagged leverage coefficient 1 − µ equals 0.5837 and p value = 0). Full results are not reported.
We have also tested our dynamic model [Eq. (6)] by taking the variable distance = |D * it − D it−1| into consideration; that is, the difference between optimal leverage and observed leverage in the previous year (results are reported in the Appendix, Table 9). Using this definition, this variable is seen to have a significant and positive impact on SME speed of adjustment, all the rest remaining broadly similar.
This percentage is the result of dividing 4246 (observations adjusting rationally) by 8167 (the total number of observations where µ can be obtained; that is, 9114 − 947).
References
Anderson, T. W., & Hsiao, C. (1982). Formulation and estimation of dynamic models using panel data. Journal of Econometrics, 18, 47–82.
Anderson, D. R., Sweeney, D. J., & Williams, T. A. (2001). Statistics for business and economics. Cincinnati: South-Western College Publishing.
Antoniou, A., Guney, Y., & Paudyal, K. (2006). The determinants of debt maturity structure: Evidence from France, Germany and the UK. European Financial Management, 12(2), 161–194.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58, 277–297.
Arellano, M., & Bover, O. (1995). Another look at the instrumental-variable estimation of error-components models. Journal of Econometrics, 68, 29–52.
Arping, S., & Lornath, G. (2006). Corporate leverage and product differenciation strategy. Journal of Business, 79(6), 3175–3207.
Baltagi, B. H. (2005). Econometric analysis of panel data. Chichester: Wiley.
Banerjee, S., Heshmati, A., & Wihlborg, C. (2004). The dynamics of capital structure. SSE/EFI Monetary Integration, Markets and regulation Research in Banking and Finance, 4, 275–297.
Becker, C., & Gather, U. (1999). The masking breakdown point of multivariate outlier identification rules. Journal of the American Statistical Association, 94(447), 947–955.
Berger, A. N., & Udell, G. F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance, 22, 613–673.
Blundell, R. W., & Bond, S. R. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115–143.
Bond, S. (2002). Dynamic panel data models: a guide to micro data methods and practice. Portuguese Economic Journal, 1(2), 141–162.
Dammon, R. M., & Senbet, L. W. (1988). The effect of taxes and depreciation on corporate investment and financial leverage. Journal of Finance, 43(2), 353–373.
DeAngelo, H., & Masulis, R. W. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8, 3–29.
Demsetz, H., & Villalonga, B. (2001). Ownership structure and corporate performance. Journal of Corporate Finance, 7(3), 209–233.
Drobetz, W., & Fix, B. (2005). What are the determinants of the capital structure? Some evidence for Switzerland. Swiss Journal of Economics and Statistics, 141, 71–113.
Drobetz, W., & Wanzenried, G. (2006). What determines the speed of adjustment to the target capital structure? Applied Financial Economics, 16, 941–958.
Fama, E., & French, K. (2002). Testing tradeoff and pecking order predictions about dividends and debt. The Review of Financial Studies, 15, 1–33.
Flannery, M. J., & Rangan, K. P. (2006). Partial adjustment toward target capital structures. Journal of Financial Economics, 79, 469–506.
González, V., & González, F. (2008). Influence of bank concentration and institutions on capital structure: New international evidence. Journal of Corporate Finance, 14, 363–375.
Grossman, S., & Hart, O. (1982). Corporate financial structure and managerial incentives. In J. McCall (Ed.) The economics of information and uncertainty (pp. 107–140). University of Chicago, Chicago.
Hansen, L. P. (1982). Large sample properties of generalised method of moment estimators. Econometrica, 50, 1029–1054.
Heshmati, A. (2001). The dynamics of capital structure: Evidence from Swedish micro and small firms. Research in Banking and Finance, 2, 199–241.
Holtz-Eakin, D., Newey, W., & Rosen, H. S. (1988). Estimating vector autoregressions with panel data. Econometrica, 56, 1371–1396.
Hovakimian, A., Opler, T., & Titman, S. (2001). The debt-equity choice. Journal of Financial and Quantitative Analysis, 36, 1–24.
Hsiao, C. (2003). Analysis of panel data (2nd ed.). Cambridge: Cambridge University Press.
Jalilvand, A., & Harris, R. S. (1984). Corporate behaviour in adjusting to capital structure and dividend targets: An econometric study. The Journal of Finance, 39(1), 127–145.
Kim, H., Heshmati, A., & Aoun, D. (2006). Dynamics of capital structure: The case of Korean listed manufacturing companies. Asian Economic Journal, 20(3), 275–302.
Kurshev, A., & Strebulaev, I. A. (2007). Firm size and capital structure. Working paper. London: London Business School.
Lev, B. (1969). Industry averages as targets for financial ratios. Journal of Accounting Research, 7, 290–299.
Lööf, H. (2004). Dynamic optimal capital structure and technical change. Structural Change and Economic Dynamics, 15, 449–468.
López-Gracia, J., & Sogorb-Mira, F. (2008). Testing trade-off and pecking order theories financing SMEs. Small Business Economics, 31, 117–136.
Mackie-Mason, J. K. (1990). Do taxes affect corporate financing decisions? The Journal of Finance, 45(5), 1471–1493.
Michaelas, N., Chittenden, F., & Poutziouris, P. (1999). Financial policy and capital structure choice in UK SMEs: Empirical evidence from company panel data. Small Business Economics, 12, 113–130.
Miguel, A., & Pindado, J. (2001). Determinants of capital structure. New evidence from Spanish panel data. Journal of Corporate Finance, 7, 77–99.
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5, 147–175.
Myers, S. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575–592.
Myers, S., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13, 187–221.
Ozkan, A. (2001). Determinants of capital structure and adjustment to long run target: Evidence from UK company panel data. Journal of Business Finance and Accounting, 28(1 & 2), 175–198.
Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421–1460.
Scherr, F. C., & Hulburt, H. M. (2001). The debt maturity structure of small firms. Financial Management, Spring, 85–111.
Schmiemann, M. (2008). Enterprises by size class—overview of SMEs in the EU. Eurostat Statistics in Focus. Luxembourg: EuroStat.
Shyam-Sunder, L., & Myers, S. C. (1999). Testing static trade-off against pecking order models of capital structure. Journal of Finance Economics, 51, 219–244.
Sogorb, F. (2005). How SME uniqueness affects capital structure: Evidence from a 1994–1998 Spanish data panel. Small Business Economics, 25, 447–457.
Statacorp. (2007). Stata Statistical Software: Release 10.0. College Station: Stata Corporation.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1–19.
Wald, J. (1999). How firm characteristics affect capital structure: An international comparison. Journal of Financial Research, 22, 161–187.
Acknowledgements
The authors would like to thank Almas Hesmati, Robert Blackburn, Julio Pindado and Félix López for valuable feedback and encouragement. Comments and suggestions from our Faculty colleagues Juan Sanchis and Emilio Farinos are also gratefully acknowledged. We are solely responsible for any remaining errors.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Aybar-Arias, C., Casino-Martínez, A. & López-Gracia, J. On the adjustment speed of SMEs to their optimal capital structure. Small Bus Econ 39, 977–996 (2012). https://doi.org/10.1007/s11187-011-9327-6
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11187-011-9327-6