What do we know about the capital structure of small firms?
Firm data from ten Western European countries is used in this paper to contrast the sources of leverage across small and large, as well as across listed and unlisted firms. Specifically, the explanatory power of firm-specific, country of incorporation institutional, and macroeconomic factors is evaluated. Using data that is more comprehensive in coverage than that used in the existing research the stylized facts of the capital structure literature for large and listed firms is confirmed, but contrasting evidence is obtained for smaller companies. First, the country of incorporation carries much more information for small firms, supporting the idea that small firms are more financially constrained and face non-firm-specific hurdles in their capital structure choice. Second, using two different leverage measures it is shown that the relationship of firm size and tangibility to leverage is robust to the measure used for listed, but not for unlisted firms.
KeywordsCapital structure Small firms Unlisted firms International evidence
JEL ClassificationsG10 G32 L25 L33 L26
I am indebted to Ron Anderson and Štěpán Jurajda for many valuable discussions and comments. I thank Jan Svejnar, two anonymous referees and the editor for their helpful comments. The paper was written while I was visiting the William Davidson Institute (WDI), University of Michigan Business School. I would like to thank WDI for their hospitality and data access. I gratefully acknowledge financial support from CERGE-EI and partial support from Charles University research grant GAUK 348/2005.
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