A Study of Characteristics and Determinants of Capital Structure in the UK SMEs Context.
[Dissertation (University of Nottingham only)]
This dissertation studies the characteristics and determinants of capital structure of the UK small- and medium-sized enterprises (SMEs)- by utilizing a balanced panel data comprising 135 UK SMEs from 2001 to 2010. Specifically, the potential determinants of UK SMEs’ capital structure that will be tested in this paper are profitability, firm size, growth opportunities, tangibility, business risk, non-debt tax shields, industry effects and time effects and economic downturns. To achieve this objective, we first review the capital structure theories, especially the trade-off theory and the pecking order theory. Based on the various theories, we set the testable hypotheses for each potential determinant. Afterwards, the panel data estimators- Within Group estimator (Fixed-Effects model), Random-Effects model (RE) and Least Square Dummy Variable estimator (LSDV) are used to empirically test the determinants.
The empirical results have indicated that SMEs’ capital structure differs from large firms due to their own characteristics. Moreover, the results partially coincide with both trade-off theory and pecking order theory, but appear to be a greater validity of the pecking order theory for SMEs, such as strongly evidenced negative influence of profitability and of firm size and positive effect of tangibility on SMEs’ capital structure. A negative effect of non-debt tax shields on long-term debt supports the trade-off theory. The positive effect of tangibility can also support the trade-off theory. Moreover, industry effects and time effects are evidenced to be significantly related to SMEs’ long-term capital structure decisions. SMEs will reduce their long-term debt during economic downturns. No effects of growth opportunities and business risk are found on UK SMEs’ capital structure. Furthermore, the results indicate the effects of the explanatory variables are greater on long-term debt. Only profitability, firm size and industry effects are evidenced to be related to short-term debt.
Key words: Capital structure, UK SMEs, Trade-off theory, Pecking-order theory
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