Small Business Economics

, Volume 35, Issue 3, pp 357–375 | Cite as

Determinants of capital structure in Irish SMEs

Article

Abstract

This paper presents an empirical examination of determinants of the capital structure of a sample of 299 Irish small and medium-sized enterprises (SMEs). Results suggest that age, size, level of intangible activity, ownership structure and the provision of collateral are important determinants of the capital structure in SMEs. A generalisation of Zellner’s (Journal of the American Statistical Association57, 348–368, 1962) seemingly unrelated regression (SUR) approach is used to examine industry effects and to test the stability of parameter estimates across sectors. We find that the influence of age, size, ownership structure and provision of collateral is similar across industry sectors, indicating the universal effect of information asymmetries. Firms overcome the lack of adequate collateralisable firm assets in two ways: by providing personal assets as collateral for business debt, and by employing additional external equity to finance research and development projects.

Keywords

Capital structure SME Zellner’s SUR model 

JEL Classifications

E44 G21 G32 L26 

References

  1. Ang, J. S. (1991). Small business uniqueness and the theory of financial management. The Journal of Small Business Finance, 1, 1–13.Google Scholar
  2. Audretsch, D. B., & Elston, J. A. (1997). Financing the German mittelstand. Small Business Economics, 9, 97–110.CrossRefGoogle Scholar
  3. Avery, R. B., Bostic, R. W., & Samolyk, K. A. (1998). The role of personal wealth in small business finance. Journal of Banking and Finance, 22, 1019–1061.CrossRefGoogle Scholar
  4. Baas, T., & Schrooten, M. (2006). Relationship banking and SMEs: A theoretical analysis. Small Business Economics, 27, 127–137.CrossRefGoogle Scholar
  5. Balakrishnan, S., & Fox, I. (1993). Asset specificity, firm heterogeneity and capital structure. Strategic Management Journal, 14, 3–16.CrossRefGoogle Scholar
  6. Baltagi, B. H. (2005). Econometric analysis of panel data. Chichester: Wiley.Google Scholar
  7. Berger, A. N., & Udell, G. F. (1990). Collateral, loan quality, and bank risk. Journal of Monetary Economics, 25, 21–42.CrossRefGoogle Scholar
  8. 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 and Finance, 22, 613–673.CrossRefGoogle Scholar
  9. Berggren, B., Olofsson, C., & Silver, L. (2000). Control aversion and the search for external financing in Swedish SMEs. Small Business Economics, 15, 233–242.CrossRefGoogle Scholar
  10. Bester, H. (1985). Screening vs. rationing in credit markets with imperfect information. American Economic Review, 75, 850–855.Google Scholar
  11. Binks, M. R., Ennew, C. & Reed, G. (1988). Small Business and Banks: A two nation perspective. The forum of private business, UK and the national federation of independent businesses, USA.Google Scholar
  12. Black, J., De Meza, D., & Jeffreys, D. (1996). House prices, the supply of collateral and the enterprise economy. The Economic Journal, 106, 60–75.CrossRefGoogle Scholar
  13. Bougheas, S. (2004). Internal vs external financing of R&D. Small Business Economics, 22, 11–17.CrossRefGoogle Scholar
  14. Cassar, G. (2004). The financing of business start-ups. Journal of Business Venturing, 19, 261–283.CrossRefGoogle Scholar
  15. Cassar, G., & Holmes, S. (2003). Capital structure and financing of SMEs: Australian evidence. Accounting and Finance, 43, 123–147.CrossRefGoogle Scholar
  16. Chittenden, F., Hall, G., & Hutchinson, P. (1996). Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation. Small Business Economics, 8, 56–67.CrossRefGoogle Scholar
  17. Chittenden, F., Poutziouris, P., Michaelas, N., & Watt, T. (1998). The march 1998 budget and small business taxation. London: National Westminster Bank.Google Scholar
  18. Coco, G. (2000). On the use of collateral. Journal of Economic Surveys, 14, 191.CrossRefGoogle Scholar
  19. Cosh, A., & Hughes, A. (1994). Size, financial structure and profitability: UK companies in the 1980s. In: Hughes, A., & Storey, D. J. (Eds.), Finance and the small firm. London: Routledge.Google Scholar
  20. Cox, B. G., Elliehausen, G. E. & Wolken, J. D. (1989). Surveying small businesses about their finances. Proceedings of the section on survey research methods. American Statistical Association. Virginia.Google Scholar
  21. Cressy, R. (1993). Loan commitments and business starts: An empirical investigation of UK data. England: Warwick Business School, CMSE Centre.Google Scholar
  22. Cressy, R. (2006). Why do most firms die young? Small Business Economics, 26, 103–116.CrossRefGoogle Scholar
  23. Cressy, R., & Olofsson, C. (1997). The financial conditions for Swedish SMEs: Survey and research agenda. Small Business Economics, 9, 179–194.CrossRefGoogle Scholar
  24. Curran, J., & Blackburn, R. A. (2001). Researching the small enterprise. London: Sage.Google Scholar
  25. De Jong, A., & Van Dijk, R. (2007). Determinants of leverage and agency problems: A regression approach with survey data. The European Journal of Finance, 13, 565–593.CrossRefGoogle Scholar
  26. De Meza, D., & Webb, D. C. (2000). Does credit rationing imply insufficient lending? Journal of Public Economics, 78, 215–234.CrossRefGoogle Scholar
  27. DeAngelo, H., & Masulis, R. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics, 8, 5–29.CrossRefGoogle Scholar
  28. Diamond, D. W. (1989). Reputation acquisition in debt markets. Journal of Political Economy, 97(4), 828–862. CrossRefGoogle Scholar
  29. Esperanca, J. P., Gama, A. P. M., & Gulamhussen, M. A. (2003). Corporate debt policy of small firms: An empirical (Re) examination. Journal of Small Business and Enterprise Development, 10, 62–80.CrossRefGoogle Scholar
  30. European Commission (2003). Recommendation 2003/361/EC concerning the definition of small and medium-sized enterprises as published in the official. Journal of the European Union L, 124, p 36.Google Scholar
  31. Evans, D. S., & Jovanovic, B. (1989). An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy, 97, 808–827.CrossRefGoogle Scholar
  32. Fluck, Z., Holtz-Eakin, D. & Rosen, H. S. (1998). Where does the money come from? The financing of small entrepreneurial enterprises. metropolitan studies program series. Occasional paper no. 191, center for policy research, maxwell school of citizenship and public affairs, syracuse university.Google Scholar
  33. Fu, T.-W., Ke, M.-C., & Huang, Y.-S. (2002). Capital growth, financing source and profitability of small businesses: Evidence from Taiwan small enterprises. Small Business Economics, 18, 257–267.CrossRefGoogle Scholar
  34. Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E., & Tatham, R. L. (2006). Multivariate data analysis. Upper Saddle River, New Jersey: Pearson Prentice Hall.Google Scholar
  35. Hall, B. H. (2002). The financing of research and development. Oxford Review of Economic Policy, 18, 35–51.CrossRefGoogle Scholar
  36. Hall, G., Hutchinson, P., & Michaelas, N. (2004). Determinants of the capital structures of european SMEs. Journal of Business Finance and Accounting, 31, 711–728.CrossRefGoogle Scholar
  37. Hall, G., Hutchinson, P. J., & Michaelas, N. (2000). Industry effects on the determinants of unquoted SMEs’ capital structure. International Journal of the Economics of Business, 7, 297–312.CrossRefGoogle Scholar
  38. Hamilton, R. T., & Fox, M. A. (1998). The financing preferences of small firm owners. International Journal of Entrepreneurial Behaviour and Research, 4(3), 239–248.Google Scholar
  39. Hand, J. H., Lloyd, W. P., & Rogow, R. B. (1982). Agency relationships in the close corporation. Financial Management, 11, 25–30.CrossRefGoogle Scholar
  40. Heyman, D., Deloof, M., & Ooghe, H. (2008). The financial structure of private held Belgian firms. Small Business Economics, 30, 301–313.CrossRefGoogle Scholar
  41. Hogan, T., & Hutson, E. (2005). Capital structure in new technology-based firms: Evidence from the Irish software sector. Global Finance Journal, 15, 369–387.CrossRefGoogle Scholar
  42. Holmes, S., & Kent, P. (1991). An empirical analysis of the financial structure of small and large Australian manufacturing enterprises. The Journal of Small Business Finance, 1, 141–154.Google Scholar
  43. Howorth, C. A. (2001). Small firms’ demand for finance: A research note. International Small Business Journal, 19, 78–86.CrossRefGoogle Scholar
  44. Ibbotson, R. G., Sindelar, J. L., & Ritter, J. (2001). Initial public offerings. In D. H. J. Chew (Ed.), The new corporate finance. Where theory meets practice (3rd ed.). New York: McGraw Hill-Irwin.Google Scholar
  45. Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.CrossRefGoogle Scholar
  46. Jordan, J., Lowe, J., & Taylor, P. (1998). Strategy and financial policy in UK small firms. Journal of Business Finance and Accounting, 25, 1–27.CrossRefGoogle Scholar
  47. Kon, Y., & Storey, D. J. (2003). A theory of discouraged borrowers. Small Business Economics, 21, 37–49.CrossRefGoogle Scholar
  48. Long, M. S., & Malitz, I. B. (1985). Investment patterns and financial leverage. In: Friedman, B. (Ed.), Corporate capital structures in the United States. Chicago: University of Chicago Press. Google Scholar
  49. Lopez-Gracia, J., & Aybar-Arias, C. (2000). An empirical approach to the financial behaviour of small and medium sized companies. Small Business Economics, 14, 55–63.CrossRefGoogle Scholar
  50. Manove, M., Padilla, A. J., & Pagano, M. (2001). Collateral versus project screening: A model of lazy banks. RAND Journal of Economics, 32, 726–744.CrossRefGoogle Scholar
  51. 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.CrossRefGoogle Scholar
  52. Mishra, C. S., & McConaughy, D. L. (1999). Founding family control and capital structure: The risk of loss of control and the aversion to debt. Entrepreneurship Theory and Practice, 23, 53–64.Google Scholar
  53. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261–297. Google Scholar
  54. Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: A correction. The American Economic Review, 53(3), 433–443. Google Scholar
  55. Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39, 575–592.CrossRefGoogle Scholar
  56. Myers, S. C., & 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.CrossRefGoogle Scholar
  57. Ou, C., & Haynes, G. W. (2006). Acquisition of additional equity capital by small firms—Findings from the national survey of small business finances. Small Business Economics, 27, 157–168.CrossRefGoogle Scholar
  58. Pettit, R. R., & Singer, R. F. (1985). Small business finance: A research agenda. Financial Management, 14, 47–60.CrossRefGoogle Scholar
  59. Poutziouris, P. (2003). The strategic orientation of owner-managers of small ventures. International Journal of Entrepreneurial Behaviour & Research, 9, 185–214.CrossRefGoogle Scholar
  60. Poutziouris, P., Chittenden, F., & Michaelas, N. (1998). The Financial Affairs of Private Companies. Liverpool: Tilney Fund Management.Google Scholar
  61. Poutziouris, P. Z. (2001). The views of family companies on venture capital: empirical evidence from the uk small to medium-size enterprising economy. Family Business Review, 14, 277–291.CrossRefGoogle Scholar
  62. Ross, S. A. (1977, Spring). The determination of financial structure: The incentive-signalling approach. Bell Journal of Economics, 8(1), 23–40.Google Scholar
  63. Smart, S. B., Megginson, W. L., & Gitman, L. J. (2007). Corporate Finance. Mason: Thomson South-Western.Google Scholar
  64. Smith, R. L., & Smith, J. K. (2004). Entrepreneurial finance (2nd ed.). New York: Wiley.Google Scholar
  65. Sogorb Mira, F. (2005). How SME uniqueness affects capital structure: evidence from a 1994–1998 Spanish data panel. Small Business Economics, 25, 447–457.CrossRefGoogle Scholar
  66. Storey, D. J. (1994). Understanding the Small Business Sector. London: Routledge.Google Scholar
  67. Tanaka, M. (2003). The macroeconomic implications of the new Basel accord. CESifo Economic Studies, 49, 217–232.CrossRefGoogle Scholar
  68. Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, XLIII, 1–19.CrossRefGoogle Scholar
  69. Van Der Wijst, N., & Thurik, R. (1993). Determinants of small firm debt ratios: an analysis of retail panel data. Small Business Economics, 5, 55–65.CrossRefGoogle Scholar
  70. Voordeckers, W., & Steijvers, T. (2006). Business collateral and personal commitments in SME lending. Journal of Banking & Finance, 30, 3067–3086.CrossRefGoogle Scholar
  71. Watson, R., & Wilson, N. (2002). Small and medium size enterprise financing: a note on some of the empirical implications of a pecking order. Journal of Business Finance & Accounting, 29(3–4), 557–579.CrossRefGoogle Scholar
  72. Westhead, P., & Storey, D. J. (1997). Financial constraints on the growth of high technology small firms in the United Kingdom. Applied Financial Economics, 7, 197–201.CrossRefGoogle Scholar
  73. Zellner, A. (1962). An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias. Journal of the American Statistical Association, 57, 348–368.CrossRefGoogle Scholar
  74. Zingales, L. (2000). In search of new foundations. The Journal of Finance, 55, 1623–1653.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  1. 1.FiontarDublin City UniversityDublinIreland
  2. 2.School of BusinessTrinity College DublinDublinIreland

Personalised recommendations