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Pecking Order Theory versus Trade-Off Theory: are service SMEs’ capital structure decisions different?

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Abstract

This paper seeks to analyse if the capital structure decisions of service small and medium-sized enterprises (SMEs) are different from those of other types of firm. To do so, we consider four research samples: (i) 610 service SMEs; (ii) 126 service large firms; (iii) 679 manufacturing and construction SMEs; and (iv) 132 manufacturing and construction large firms. Using the two-step estimation method, the empirical evidence obtained in this study shows that the capital structure decisions of service SMEs are different from those of other types of firm. Service SMEs’ capital structure decisions are closer to the assumptions of Pecking Order Theory and further removed from those of Trade-Off Theory compared with the case of other types of firm.

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Notes

  1. The inverse Mill’s ratio is the ratio between cumulative density function and the density function. The designation of inverse Mill’s ratio is due to the fact that Mill’s ratio considers the inverse of Hazard ratio (also known as force of mortality). For a detailed description of calculation of the inverse Mill’s ratio, see Heckman (1979).

  2. In this study, we find persistence of debt for service SMEs and other types of firms. The correlation coefficient of present debt and previous debt is 0.81991 in service SMEs, 0.84513 in service large firms, 0.82737 in manufacturing and construction SMEs, and 0.85616 in manufacturing and construction large firms. Therefore, it is clearly advisable to use the GMM system (1998) estimator, rather than the GMM (1991) estimator.

  3. Services include: Real Estate Activities; Renting of Machinery and Equipment without Operator and Personal and Household Goods; Computer and Related Activities; and Other Business Activities. Other sector firms include: Manufacture of food products; Manufacture of textiles; Manufacture of wood and paper-related products; Manufacture of chemicals and chemical products; Manufacture of basic metals; Manufacture of machinery and equipment; and Construction.

  4. For service SMEs, the median of cash flow is 0.067818, being 0.07231 for service large firms, 0.05018 for manufacturing and construction SMEs, and 0.06661 for manufacturing and construction large firms. The median of growth opportunities is 0.08516 for service SMEs, being 0.04561 for service large firms, 0.07918 for manufacturing and construction SMEs, and 0.04019 for manufacturing and construction large firms.

    The median values of the cash flow and growth opportunities variables used for calculating the HGOLCF and LGOHCF variables are calculated according to what is presented in Sect. 3.

  5. Although in this case the relationship is only statistically significant at 10% level.

  6. From the results presented in Table 2, we see that on average, the tangible assets of service SMEs are 0.29778, while the tangible assets of manufacturing and construction SMEs are 0.34997.

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Acknowledgments

The authors gratefully acknowledge the helpful comments of two anonymous reviewers and of the editor that substantially improved the paper. Zélia Serrasqueiro and Paulo Maçãs Nunes also gratefully acknowledge partial financial support from FCT, program POCTI.

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Authors and Affiliations

  1. Management and Economics Department, Beira Interior University, Covilhã, Portugal

    Zélia Silva Serrasqueiro & Paulo Maçãs Nunes

  2. CEFAGE Research Center, Évora University, Évora, Portugal

    Zélia Silva Serrasqueiro & Paulo Maçãs Nunes

  3. Management and Economics School, Minho University, Braga, Portugal

    Manuel Rocha Armada

  4. NEGE Research Center, Minho University, Braga, Portugal

    Manuel Rocha Armada

  5. Faculdade de Ciências Sociais e Humanas, Universidade da Beira Interior, Estrada do Sineiro, Polo IV, Ernesto Cruz, 6200-209, Covilhã, Portugal

    Zélia Silva Serrasqueiro

Authors
  1. Zélia Silva Serrasqueiro
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  2. Manuel Rocha Armada
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  3. Paulo Maçãs Nunes
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Correspondence to Zélia Silva Serrasqueiro.

Appendix: Alternative estimator—Trade-Off Theory model

Appendix: Alternative estimator—Trade-Off Theory model

See Table 12.

Table 12 Trade-Off Theory model—LSDVC (2005) estimator
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Serrasqueiro, Z.S., Armada, M.R. & Nunes, P.M. Pecking Order Theory versus Trade-Off Theory: are service SMEs’ capital structure decisions different?. Serv Bus 5, 381–409 (2011). https://doi.org/10.1007/s11628-011-0119-5

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