Credit supply and SME corporate capital structure in Finland: evidence from the financial crisis
Year: 2014
Type: dissertation
Abstract: This paper tests how firm characteristics and credit supply fluctuations affect Small and Medium\nEnterprises (SME)'s external funding. This is done by doing empirical research on panel data\nconsisting of 4990 Finnish SME during a time-period of 2002-2012, gathered from Voitto+\ndatabase. Analysis is done by researching the leverage ratio as a function of firm specific attributes,\nwhich are hypothesized by capital structure theories, and using them as controlling variables in\norder to find exogenous factors effect on yearly development of Finnish SMEs' capital structure.\n\nEmpirical part of the study utilizes fixed effect and logit regression models on panel data to test the\nhypotheses. Regression models include level model, where the explanatory variables are ratios of\nrelated to total assets of the firms. Second model used is difference model, where ratios of variables\nrelated to total assets are calculated as yearly differences between these ratios. Last model used is\nthe logit model for funding decisions, where issuance of external capital is defined as overall\nchange in capital between years being higher than threshold value of 1% of total assets in the\nprevious year.\n\nThe results suggest a significant reduction of external debt during the years of financial crisis.\nExogenous factors account for -1,05 percentage point reduction in the level of total debt to assets\nduring the period of 2009-2012. Difference model shows a significant reduction during the years\n2008-2009 for the amount of -1,3 percentage point of total leverage scaled by total assets. Latter is\nalso supported by the logit model for capital issuances, which shows a -1,56% decrease in the\nprobability of external debt issuance during the years 2008-2012 compared to the earlier years\n2002-2007. Most of the determinants of the capital structure presented by capital structure theories\nappear to be relevant for the Finnish SMEs. Size, fixed tangible assets, growth opportunities and\ninventory seems to have positive relationship with leverage. Age, profitability, non-debt tax\nshields, effective tax rate and accounts payable have a negative relationship with debt. Profitability\nplays an important role in defining the amount of internal funds the company has available and it\nhas a significant effect on capital issuance decisions by reducing the probability of external debt\nissuance for 13,6 percentage points of the total assets scaled profitability. Therefore, the results\nsuggest that Finnish SMEs favor internally generated funds over external funds, which only\nstrengthens if companies become more profitable. This applies for both, debt issuances and equity\nissuances. From the results for capital structure determinants and funding choices, Finnish SMEs\nseem to follow pecking order theory in their funding decisions.
Source: Aaltodoc (Aalto University)
Author: Jesse Lundström
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2598090538