Small Business Economics

, Volume 31, Issue 2, pp 117–136 | Cite as

Testing trade-off and pecking order theories financing SMEs

  • José López-Gracia
  • Francisco Sogorb-MiraEmail author


This paper explores two of the most important theories behind financial policy in Small- and Medium-Sized Enterprises (SMEs), namely, the pecking order and the trade-off theories. Panel data methodology is used to test empirical hypotheses on a sample of 3,569 Spanish SMEs over a 10-year period dating from 1995 to 2004. Results suggest that both theoretical models help to explain SME capital structure. However, despite finding clear evidence that SMEs follow a funding source hierarchy (pecking order model), our results reveal that greater trust is placed in SMEs that aim to reach target or optimum leverage (trade-off model). This remains true even when SMEs take a long time to reach this level, due to the high transaction costs they have to face. Non-debt tax shields (NDTS), growth opportunities and internal resources all seem to play an important role in determining SME capital structure. Both size and age are also found to be significant factors. Moreover, the empirical evidence obtained confirms that SMEs clearly behave differently to large firms where financing is concerned.


Pecking order Trade-off Capital structure Small- and Medium-Sized Enterprises 

JEL Classifications

G32 C33 L26 



The authors are grateful for comments and suggestions concerning earlier drafts from Alejandro Casino, Amado Peiró, Juan Sánchis and two anonymous referees at the Small Business Economics: An International Journal.


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Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.Facultad de EconomíaUniversitat de ValènciaValenciaSpain
  2. 2.Departamento de Economía y EmpresaUniversidad CEU Cardenal HerreraElcheSpain

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