No abstract

Capital structure, SME financing, C23, G32, L26,

This paper investigates the relationship between firm efficiency and leverage. We consider both the effect of leverage on firm performance as well as the reverse causality relationship. In particular, we address the following questions: Does higher leverage lead to better firm performance? Does efficiency exert a significant effect on leverage over and above that of traditional financial measures of capital structure? Is the effect of efficiency on leverage similar across different capital structures? What is the signalling role of efficiency to creditors or investors? Using a sample of 12,240 New Zealand firms we find evidence supporting the theoretical predictions of the Jensen and Meckling (1976) agency cost model. Efficiency measured as the distance from the industry's 'best practice' production frontier is positively related to leverage over the entire range of observed data. The frontier is constructed using the non-parametric Data Envelopment Analysis (DEA) method. Using quantile regression analysis we show that the reverse causality effect of efficiency on leverage is positive at low to mid-leverage levels and negative at high leverage ratios. Firm size also has a non-monotonic effect on leverage: negative at low debt ratios and positive at mid to high debt ratios. The effect of tangibles and profitability on leverage is positive while intangibles and other assets are negatively related to leverage. Copyright 2007 The Authors Journal compilation (c) 2007 Blackwell Publishing Ltd.

We investigate the capital structure determinants of small and medium sized enterprises (SMEs) using a sample of Greek and French firms. We address the following questions: Are the capital structure determinants of SMEs in the two countries driven by similar factors? Are potential differences driven by country-specific or firm-specific factors? Are the size and structure of their financial markets important factors to explain any cross-country differences on SME capital structure? To answer these questions we apply panel data methods to the sample of firms for the period 1998 to 2002. We assess the extent to which the debt to assets ratio of firms depends upon their asset structure, size, profitability and growth rate. The results show that the SMEs in both countries exhibit similarities in their capital structure choices. Asset structure and profitability have a negative relationship with leverage, whereas firm size is positively related to their debt to assets ratio. Growth is statistically significant only for France and is positively related to debt. We attribute these similarities to their institutional characteristics and in particular the commonality of their civil law systems. We find differences in the intensity of the capital structure relationship between the two countries. We provide evidence that these differences are due to firm-specific rather than country factors.