Determinants of the Capital Structure of SMEs: A Seemingly Unrelated Regression Approach

Abstract

This paper presents an empirical examination of firm characteristic determinants of the capital structure of a sample of 299 Irish small and medium sized firms (SMEs hereafter). Hypotheses are formulated from pecking order and agency theories incorporating a financial growth life cycle approach, and are tested on a number of multivariate regression models. The results suggest that age, size, level of intangible activity, ownership structure and the provision of collateral are important determinants of the capital structure in SMEs. A generalisation of Zellner's (1962) Seemingly Unrelated Regression approach (SUR hereafter) is used to examine industry effects and to test the stability of parameter estimates across sectors. Results suggest that the influence of age, size, ownership structure and provision of collateral is constant across industry sectors, indicating the universal effect of information asymmetries. Surmounting these information asymmetries is influenced by differences in asset structure across sectors, resulting in diverse sectoral financing choices.