Capital structure determinants of small and medium-sized enterprises: evidence from Central and Eastern Europe

Leszek Czerwonka,Jacek Jaworski

doi:10.1108/jsbed-09-2020-0326

Abstract

PurposeThe main aim of the paper is to examine the small and medium-sized enterprises’ (SMEs) capital structure determinants in Central and Eastern Europe (CEE) (Poland, Czechia, Slovakia, Hungary, Bulgaria and Romania).Design/methodology/approachThe authors used panel models to analyze financial data of 15,253 companies operating in the years 2014–2017.FindingsThe authors confirmed the dominant role of firm-specific factors. Industry and country variables explain only 4% of debt variability of the surveyed companies. The direction of influence of the diagnosed firm-specific factors is consistent with the pecking order theory. About one-fourth of SMEs in CEE hold a stock of debt capacity. It negatively affects the share of debt in the capital. The authors did not confirm the influence of the systematic industry business risk.Research limitations/implicationsThe limitations of the study are (1) the inclusion of only six CEE countries in the sample; (2) the exclusion of microenterprises from the sample; (3) the capital structure relationships are observed following the applications of static panel; (4) the endogeneity issue has not been addressed in the model.Practical implicationsThis study shows that business-friendly institutional environment is an important factor influencing the indebtedness of companies. It increases the leverage and, consequently, the return on equity, especially in CEE countries.Originality/valueSME analyses in CEE countries are not as frequent as for other regions. Despite the classical determinants of the SMEs' capital structure, the authors have included debt capacity and systematic industry business risk in this study.

Highlights

The most numerous as well as the most significant group of economic entities in the European Union (EU) is the small and medium-sized enterprise (SME) sector
We demonstrate that all classical firm-specific factors significantly affect the capital structure of small and medium-sized enterprises’ (SMEs)
We show that the degree of friendliness of the legal and institutional business environment and access to credit in the private sector are institutional country-specific factors that significantly increase corporate indebtedness

Summary

Introduction

The most numerous as well as the most significant group of economic entities in the European Union (EU) is the small and medium-sized enterprise (SME) sector. Research on industry-specific capital structure determinants in the SME sector most often focuses on showing differences in the impact of industry-specific factors The identification of these factors was done, among others, by Mac an Bhaird and Lucey (2010) and Degryse et al (2012). The selection of countries was dictated by the following criteria: (1) the date of accession to the EU, (2) the level of economic development, (3) the quantity and quality of data in the EMIS database and above all, (4) the common region: CEE Such selection of the research sample was of interest for the authors of the study due to their country of origin and at the same time gave the opportunity to compare the results obtained with other countries of the region, which as a whole constitutes an important part of the EU. Annual GDP growth was used as a macroeconomic country-specific factor

13 Inflation

Slovakia Fixed effects

Findings

Conclusions