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Are the determinants of capital structure country or firm specific?

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Abstract

In this paper we investigate the capital structure determinants of Greek, French, Italian, and Portuguese small and medium-sized enterprises (SMEs). We compare the capital structures of SMEs across countries and differences in country characteristics, asset structure, size, profitability, risk, and growth and how these may impact capital structure choices. The results show that SMEs in these countries determine their capital structure in similar ways. We attribute these similarities to the country institutional and financial characteristics and the commonality of their civil law systems. However, structural differences arise due to firm specific effects. We find that size is positively related to leverage while the relationship between leverage and asset structure, profitability and risk is negative. Growth is not a statistically significant determinant of leverage for any of the four countries. Our main conclusion is that firm-specific rather than country facts explain differences in capital structure choices of SMEs.

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Notes

  1. For example Var Hoorn (1979) states that: “There is no definite demarcation line between “small and medium-sized” and “large”. Even large companies can show characteristics in their strategic planning or make mistakes which are typical for small companies” (Van Hoorn 1979, p. 87).

  2. Recommendation 96/280/EC, April 3; 1996. Note that these criteria were altered in 2003. On 6 May 2003 the Commission adopted a new Recommendation 2003/361/EC regarding the SME definition which replaced Recommendation 96/280/EC as from 1 January 2005 (see Commission of the EC 2003). According to the new definition SMEs must have an annual turnover of less than 50 million euros, and an annual balance sheet of less than 43 million euros. In this study, we follow the 1996 SMEs definition as our sample covers the period 1997–2002.

  3. “Optimal level” is used by Beck and Demirguc-Kunt (2006) to explain that financing obstacles may prevent SMEs from reaching a size-level that they would reach in the absence of these obstacles.

  4. These include controlled administration procedure, out-of-court proceedings, and preventive creditors’ settlement procedure.

  5. Private Credit is credit extended to the private sector by banks and other financial institutions, divided by GDP. Market Capitalization is stock market capitalization accounted by the value of outstanding shares divided by GDP. Judicial Efficiency, scored 0–10, is a measure of the efficiency and integrity of the legal environment as it affects business, with higher values indicating more efficiency. Contract Enforcement is a measure of contract efficiency and is the time in calendar days it takes for dispute resolution. Corruption, scored 0–6, is an indicator of the level of corruption in the government. Property Rights, scored 1–5, is a rating of property rights in each country. Legal Formalism, scored 1–7, is an overall indicator of formalism in commercial dispute resolution. Values are 1988–1997 averages.

  6. Between 1996 and 2001 the factoring turnover has risen in Europe (an exception is France) and the highest increases of factoring turnover can be seen in Spain (+300%) and Greece (+574%) (Observatory of European SMEs 2003).

  7. For a review of the literature on capital structure, see Harris and Raviv (1991) and Myers (2001).

  8. Although the SME definition includes firms up to 249 employees, most of them are microfirms (1–9 employees) (see Table 1; Sect. 2). Considering the above statistics, managers are most likely owners of SMEs.

  9. For instance in 2002 according to the same source only about 60% of the SMEs regularly provided documents such as the balance sheet and the profit and loss statement. Around 8% of the SMEs handed over to their financier their annual budget, whilst 7% also shared financial plans or cash flows forecasts with them and about 4% provided information on inventories or unpaid invoices.

  10. We exclude these firms because their leverage is strongly influenced by explicit (or implicit) investor insurance schemes such as deposit insurance and their debt-like liabilities are not strictly comparable to the debt issued by non-financial firms (see Rajan and Zingales 1995). Furthermore, banks differ substantially from non-financial firms because they are protected by a regulatory safety net.

  11. The model is estimated for the period 1998–2002 because we allow for 1 year lag in our empirical analysis.

  12. However, note that one possible disadvantage is that variables such as age cannot be included as regressors.

  13. We have also estimated the panel regression model using lagged values of the asset structure, profitability, and growth variables. The results are very similar suggesting that it is unlikely that the reported estimates are subject to serious simultaneity bias problems.

  14. The residual sum of squares is reported in Table A in the Appendix.

  15. There was no evidence from likelihood ratio tests to suggest that time effects had a significant effect on leverage in any of the panel regressions we run.

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Acknowledgements

We are grateful to the Editor of this journal, two anonymous referees and to Dimitris Margaritis for their valuable comments.

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Authors and Affiliations

  1. Department of Economics, University of Nice-Sophia Antipolis, GREDEG-CNRS-Demos, 250, rue A. Einstein, Valbonne, 06560, France

    Maria Psillaki

  2. Department of Marketing and Communication, Athens University of Economics and Business, Patision 76, GR 10434, Athens, Greece

    Nikolaos Daskalakis

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  1. Maria Psillaki
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  2. Nikolaos Daskalakis
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Correspondence to Maria Psillaki.

Appendix

Appendix

In Table A we present the regression results from pooling the observations of all four countries to get the residual sum of squares for the calculation of the F-test. Table B shows the results of the fixed-effects regressions.

Table A France, Greece, Italy, and Portugal
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Table B Fixed effects regressions
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Psillaki, M., Daskalakis, N. Are the determinants of capital structure country or firm specific?. Small Bus Econ 33, 319–333 (2009). https://doi.org/10.1007/s11187-008-9103-4

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