Financing SMEs : an investigation of determinants of capital structures

Abstract

This study examines the financing of small and medium sized enterprises (SMEs) by conducting an empirical investigation of determinants of capital structure. It commences with a review of both the financial growth life cycle model and capital structure theories of financing, and notes various gaps in the literature. Building on these gaps, it is hypothesised that capital structures of SMEs are partly determined by a combination of firm-specific characteristics and owner-specific factors such as desire for control and managerial independence. In order to investigate the hypothesis further, a questionnaire survey is conducted on a sample of Irish SMEs. Based on this, conclusions are drawn about the financing of SMEs in Ireland relating to specific firm characteristics, emphasising the importance of preferences and attitudes of firm owners rather than signalling or tax implications of the firm. One of the main inferences is that whilst firm owner preferences are paramount in determining capital structure, the common underlying factor in accessing external finance is the alleviation of information asymmetries which is relatively easier for firms with a high level of fixed assets accessing debt markets, with consequent management and banking repercussions.