Capital structure and its choice in Central and Eastern Europe

Abstract

We analyze the determinants of capital structure and its choice by small and medium-sized enterprises in Central and Eastern Europe from 2002 to 2007. We test the relevance of the three main theories: the Static Trade-off Theory, the Pecking Order Theory, and the Agency Theory, which have been derived primarily for developed markets, because our knowledge on their validity for emerging European countries is limited. We confirm the positive impact of size and asset tangibility on the leverage, while rejecting both the positive impact of profitability and tax, as well as the negative impact of business risk and non-debt tax shields. We report that SMEs behave homogeneously, and the relevant capital structure determinants show remarkable steadiness. Our results show a special time varying behaviour, in which the relevant determinants become stronger, while most of the country-specific factors present weakening effects. We argue that firms of the CEE countries remarkably converged their financial decision-making procedure to that of developed countries through the investigated period. The relevance of the Trade-off Theory is weak, as firms respect a one-sided upper threshold rather than converging to a fixed target on both sides, while they are not indifferent to the hierarchy of financing alternatives.

Determinants of Capital Structure: An Empirical Study of Companies From Selected Post-Transition Economies

“…It is also compatible with the findings of most of the other studies. Bauer (2004), Nivorozhkin (2004), Berk (2007), Črnigoj and Mramor (2009), Avarmaa et al (2011), Kędzior (2012 are representative for the research stream covering the post-transition economies, but the results of Hernádi and Ormos (2012) and Jõeveer (2013) in the case of listed firms fail to support this.…”

What managers think of capital structure and how they act: Evidence from Central and Eastern Europe

“…Moreover, SMEs are facing higher relative transaction costs than bigger companies in their issuance decisions. Numerous recent studies (see Berger and Udell, 1998, Berggren et al, 2000, Chittenden et al, 1996, Michaelas et al, 1999and Hernadi and Ormos, 2012 found the POT to be followed among SMEs. On the other hand, investigating this field by directly surveying financial executives in the US, Graham and Harvey (GH, 2001) perceive a pecking order-driven behavior among firms but conclude that this is not due to conventional POT factors such as size or growth, both of which should influence the implied informational asymmetry.…”

Determinants of Capital Structure in Bahrain Stock Market

“…Empirically, certain results find that size of the firm has positive impacts on its leverage like the results of Titman & Wessels (1988); Rathinasamy, Krishnaswamy, & Mantripragada (2000); Huang & song (2006). In the other side negative relationship between size and leverage of the firm has been found by Rajan & Zingales (1995); Shah & Khan (2007); Hernádi & Ormos (2012).…”