Debt financing and firm performance: an empirical study based on Swedish data

Abstract

Purpose – The purpose of this study is to examine the relationship between debt level and performance among small and medium-sized enterprises (SMEs). Design/methodology/approach – Unlike the vast majority of previous research, this study uses three-stage least squares (3SLS) and fixed-effects models to analyse a comprehensive, cross-sectoral sample of 15,897 Swedish SMEs operating in five industry sectors during the 2009-2012 period. Findings – This study confirms that debt ratios, in terms of trade credit, short-term debt and long-term debt, negatively affect firm performance in terms of profitability. As a high debt ratio seems to increase the agency costs and the risk of losing control of the firm, SME owners and managers tend to finance their businesses with equity capital to a fairly high degree. Practical implications – As debt policy significantly influences firm performance, and thereby firm value and survival, SME owners and managers should focus on finding a satisfactory debt level. Originality/value – To the authors’ best knowledge, this study is among the first to use 3SLS and fixed-effects models to analyse the relationship between debt level and firm performance. Moreover, while most previous research has examined listed firms, this study highlights the issue among SMEs, which play a fundamental role in the economy.

Environmental Performance and Financing Decisions Impact on Sustainable Financial Development of Chinese Environmental Protection Enterprises

“…The coefficient of TDR in model 2 was β = −0.744, with a statistical significance at the 1% level. Debt financing had a statistically significant and negative impact on economic performance (ROA and SGR) that was consistent with Barry and Mihov (2015) [15] and Yazdanfar and Öhman (2015) [16]. This result supports Hypothesis 1.…”

“…Yazdanfar and Öhman (2015) [17] found that high debt level may increase firms' value in the short run, but result in greater exposure to agency costs and loss of control. Similar findings were also verified by (Maina and Ishmail, 2014) [18].…”

The Relationship between Capital Structure and Financial Performance in the Companies Listed in Abu Dhabi Securities Exchange: Evidences from United Arab Emirates

“…Vatavu (2014) examined a sample of Romanian listed firms 2003-2012, they were used GMM estimation, and the result of this study was Negative relationship between leverage and profitability. Darush and Peter (2015) examined a of Swedish SMEs firm 2009-2012 they were used Three-stage least squares (3SLS) and fixed-effects models, and the result of this study was Negative relationship between debt ratios (short-term debt and long-term debt) and firm performance (profitability ratios). Chuke et al (2016) examined a sample of Nigeria listed firms 2001-2012, they were used Fixed Effects and Random Effects, and the result of this study was Negative and significant impact owing to limited long term debt.…”

“…The second view finds a negative correlation between debt level and firm performance (Nassar, 2016;Chuke et al, 2016;Darush & Peter, 2015;Vatavu, 2014;Chandrapala & Knapkova, 2013;Iorpev & Kwanum, 2012). These authors used a different methodology.…”

“…These authors used a different methodology. For example, Darush and Peter (2015) use three-stage least squares (3SLS) and fixed-effects models to analyze a comprehensive, cross-sectoral sample of 15,897 Swedish SMEs operating in five industry sectors during the 2009-2012 period. They confirm that debt ratios, in terms of trade credit, short-term debt and long-term debt, negatively affect firm performance in terms of profitability.…”