DETERMINANTS OF CAPITAL STRUCTURE OF SMEs

This paper analyzes how country- and aggregated firm-specific variables affect the capital structure of European small and medium sized enterprises. 11,720 firms across 11 European countries are studied using data from the year 2009 to 2014. Data from a survey done by the European Central Bank and European Commission are used. Country specific variables are examined to find out to what extent they affect capital structure of SMEs. The determinants of capital structure namely GDP per capita, GDP growth, inflation and interest rate are tested. The aggregated firm specific variables are Turnover, General Economic View and Profitability. Two theories are used to examine how these variables affect the capital structure. The two theories used are the pecking order theory and the trade-off theory. The results show that macroeconomic and aggregated firm specific variables are an important aspect in explaining SME’s capital structure and cannot be neglected.