HOW SME UNIQUENESS AFFECTS
CAPITAL STRUCTURE: EVIDENCE FROM
A 1994-1998 SPANISH DATA PANEL
*
Francisco Sogorb
WP-EC 2002-18
Correspondence to: Francisco Sogorb Mira, Universidad Cardenal Herrera CEU, Facultad de Ciencias
Sociales y Jurídicas, Campus de Elche, Comissari, 1 03203 Elche (Alicante), Tel.: 96 542 64 86, Fax:
96 545 95 61, E-mails: fsogorb@uch.ceu.es
, sogor.el@cue.es.
Editor: Instituto Valenciano de Investigaciones Económicas, S.A.
Primera Edición Julio 2002
Depósito Legal: V-2748-2002
IVIE working papers offer in advance the results of economic research under way in order to
encourage a discussion process before sending them to scientific journals for their final publication.
*
. The author would like to express his gratitude to J. Carlos Gómez Sala for his inestimable help and
encouragement and to Manuel Arellano, José López Gracia and Javier Suárez for their invaluable comments on
earlier drafts. The author would also like to thank the participants at the 8
th
Annual Conference of the
Multinational Finance Society (Italy, June 2001) for their helpful comments to a preliminary version of this
paper, and the insightful suggestions by an anonymous referee. Any errors or omissions are the sole
responsibility of the author.
2
HOW SME UNIQUENESS AFFECTS CAPITAL STRUCTURE:
EVIDENCE FROM A 1994–1998 SPANISH DATA PANEL
Francisco Sogorb
ABSTRACT
The principal aim of this paper is to test how firm characteristics affect Small and
Medium Enterprise (SME) capital structure. We carry out an empirical analysis over a panel
data of 6482 non–financial Spanish SMEs along the five-year period 1994–1998, modelling
the leverage ratio as a function of firm specific attributes hypothesized by capital structure
theory. Our results suggest that non–debt tax shields and profitability are both negatively
related to SME leverage, while size, growth options and asset structure influence positively
on SME capital structure; they also confirm a maturity matching behaviour in this firm group.
Keywords: Financing, Capital Structure, Trade – Off Theory, Pecking Order Theory,
SME, Panel Data.
JEL Classification: C23, G32, G33.
RESUMEN
El principal objetivo de este trabajo reside en estudiar cómo determinadas
características empresariales afectan a la estructura de capital de la Pequeña y Mediana
Empresa (PYME). Para lograr este objetivo, se lleva a cabo un análisis empírico sobre un
panel de 6482 PYMEs no financieras españolas a lo largo del lustro 1994–1998. El ratio de
endeudamiento se contempla como una función de aquellos atributos específicos de las
empresas que han sido identificados por la teoría de la estructura de capital. Los resultados
obtenidos sugieren que, tanto los escudos fiscales alternativos a la deuda como la rentabilidad
empresarial, se encuentran negativamente relacionados con el endeudamiento de las PYMEs,
mientras que el tamaño, las oportunidades de crecimiento y la estructura de los activos
influyen de forma positiva en la estructura de capital de las PYMEs. Estos resultados también
confirman un comportamiento tendente a la conciliación de vencimientos de activos y pasivos
en este grupo empresarial.
Palabras clave: Financiación, estructura de capital, “Trade-off Theory”, “Pecking
Order Theory”, PYME, Panel de Datos.
1. Introduction
It is generally accepted that small and medium enterprises, hereinafter SMEs,
represent a vast portion of the firm tissue of almost every developed country. In this
respect, the Sixth Report about European companies carried out by the European
Commission (2000), reveals that the total number of firms existing in the European
Union in 1998 mounted up to 19,370,000, from which 99.8% were considered SMEs.
Moreover, these SMEs provided approximately around 66% of European employment
and 65% of European companies’ turnover. The records for Spain are in line with the
European ones: there were 2,591,318 SMEs (99.8% of total firms) in 2000, carrying out
79.8% of Spanish employment and 62% of Spanish firm’s total sales (DGPYME, 2002).
All these figures show the great importance of this category of firms, but not always
receiving the joust attention that they really deserve. In words of Zingales (2000, p.
1629): “Empirically, the emphasis on large companies has led us to ignore (or study
less than necessary) the rest of the universe: the young and small firms, who do not
have access to public markets”.
One of the areas of financial economy that has worried much to academicians
and professionals is debt policy decisions in companies. Although there are many
previous empirical studies about financing decisions of large and listed companies
1
, the
scientific community has only started to pay attention to the small firm sector much
more recently.
In spite of this, we now have available a considerable number of empirical
works worldwide like Van der Wijst (1989), Walker (1989a,b), Holmes and Kent
(1991), Norton (1991), Van der Wijst and Thurik (1993), Chittenden et al. (1996),
Hamilton and Fox (1998), Jordan et al. (1998), Michaelas et al. (1999), Wagenvoort and
Hurst (1999) and Hall et al. (2000), and also for the Spanish context like Ocaña et al.
(1994), Maroto (1996), Boedo and Calvo (1997), López and Romero (1997), Selva y
Giner (1999), López and Aybar (2000), Aybar et al. (2001), Cardone and Cazorla
(2001) and Melle (2001).
1
For example, Bradley et al. (1984), Friend and Hasbrouck (1988), Titman and Wessels (1988), Mato (1990),
Barclay et al. (1995), Rajan and Zingales (1995), Graham (1996), Saá–Requejo (1996), Estrada y Vallés (1998),
Shyam – Sunder and Myers (1999),Hovakimian et al. (2001), Miguel and Pindado (2001) and Fama and French
(2002).
4
Following this line of research, we aim to obtain the main determinants of debt
policy decisions in small firms. In doing so, we will explain how firm characteristics
affect Small and Medium Enterprise (SME) capital structure. To achieve this goal we
use a panel data methodology controlling for individual heterogeneity, economic
activity and time effects, and a more complete and bigger sample than the foregoing
studies.
The structure of the remainder of the paper is as follows. Section 2 studies how
the existing capital structure theories can be used to explain the financing decisions in
the small business sector and at the same time we present the empirical hypotheses
extracted from the theoretical background that will be tested over a Spanish small and
medium enterprise sample. Section 3 explains in detail all the variables used in the
study; besides it describes how we have constructed the firm sample. The model
employed as well as the econometric techniques that we have applied, are discussed in
section 4. Also in this section we show the empirical results of the study with their
implications. Finally, we conclude in section 5 where we also include some proposals
for the future line of research in this area.
2. Theoretical discussion and empirical hypotheses
The seminal work of Modigliani and Miller (1958) set up the basis for the
development of a theoretical body around the firm capital structure issue. Its main
proposition establishes that the valuation of a company will be independent from its
financial structure. As this conclusion is absolutely true under the assumptions
Modigliani and Miller (1958) took into account
2
, the enlargement of the theory onwards
has been produced relaxing these fundamental assumptions, also with the aim of
approximating the theory to the firm reality. From this point of view, we can categorize
capital structure theory under different stances, depending on which economic aspect
and firm characteristic we focus on.
The conventional analysis of capital structure states that firms determine their
leverage level trading off the benefits against the shortcomings that provides debt
employment (Scott, 1976; Bradley et al, 1984). Under this line of reasoning, emerges
2
Namely, perfect capital markets, no taxes, and absence of agency and transactions costs.
5
the so–called Trade–Off Theory (TOT), which includes fiscal, financial distress and
interest conflicts issues.
Concerning the fiscal approach of the TOT, Modigliani and Miller corrected
their original paper in 1963 concluding that firms would prefer debt to other financing
resources due to the tax deductibility of interest payments. Therefore, our first TOT
hypothesis will be: “The effective tax rate should be positively related with debt” (H1).
Some authors like Pettit and Singer (1985) have pointed out that this fiscal
approach can not be applied into the small firm context, because SMEs are less likely to
be profitable and therefore to use debt in order to get tax shields. Following this line of
reasoning the foregoing hypothesis could be established as “there should not exist any
relation between debt and taxes in SMEs”
3
(H1bis).
On the other hand, DeAngelo and Masulis (1980) show that there are other
alternative tax shields such as depreciation, research and development expenses,
investment deductions, etc., that could substitute the fiscal role of debt. Therefore, our
second fiscal approach hypothesis will be: “Non–debt tax shields ought to be negatively
related to leverage” (H2).
From a financial distress perspective, Warner (1977), Ang et al. (1982) and Pettit
and Singer (1985) state that larger firms tend to be more diversified and fail less often,
so size can be an inverse proxy for the probability of bankruptcy
4
. Likewise, small
companies usually have bigger bankruptcy costs in relative terms. Under these
assertions, we can construct our third Trade–Off Theory hypothesis in the following
manner: “Firm size should be positively related to debt level” (H3).
Agency theory investigates the conflicts of interests between the various
financial stakeholders of the firm. Basically, this theory considers the conflicts of
interest brought about, on the one hand, between shareholders and debt holders and, on
the other hand, between shareholders and managers. SMEs are not likely to suffer from
this second problem due to the fact that their property identifies almost exactly with
their management and thereby there will only be a unique financial objective for these
two groups. Notwithstanding, the agency conflict between shareholder–owners and
3
Graham (1996) found a positive relation between firm size and taxes, which implies that SMEs have lower tax rates.
4
Note however, as Rajan and Zingales (1995) state, that size may also be a proxy for the information outside
investors have, which should increase their preference for equity relative to debt.
