The Debt Maturity Structure of Small Firms

Abstract

Smallfirms differ from large in taxability, ownership, flexibility, industry, economies of scale, financial market access, and level of information asymmetry. We investigate the determinants of firms' choice of the maturity structure of debt. We find that firms' maturity of assets, capital structure, and probability of default are statistically and economically important in the choice of debt maturity. We find little evidence that smallfirms' growth options, level of asymmetric information, and tax status affect debt maturity choice. Although many studies examine the choice between debt and equity in financing a firm, there has been little research on other features of debt financing, including its maturity structure. In this paper, we present an empirical investigation of the maturity structure of small-firm debt. Our work extends prior empirical research on debt maturity to a new and economically prominent group of firms. But more important are the implications for theory building on debt maturity. are not larger scaled down; they differ in basic respects that influence the choice between short- and long-term debt financing. Investigating firms' debt maturity choices contributes to our understanding of this choice. There is a substantial difference between what financial research literature calls a and what this term means elsewhere. Financial research typically investigates with publicly traded equity because many important research questions concern the effect of a firm's decisions on the market value of equity. Small firms are usually defined as the group (decile, quartile, or quintile) of publicly traded with the smallest sales or market capitalization. However, even the smallest of traded is large relative to most of the in the economy. Researchers outside finance identify as small based on their number of employees or sales volume. These are proxies for economies of scale, capital market access, management and ownership structure, and other factors that differentiate between large and (Osteryoung, Pace, and Constand, 1995; Osteryoung and Newman, 1993). One designation for a small firm is one with fewer than 500 employees; such provide 53% of employment in the US, produce 47% of total sales revenues, comprise over 95% of the total number of firms, and are responsible for most of the employment growth in recent years (USGPO, 1996). The sample in our research are much smaller and concentrated in different industries from the larger traded studied in prior research on debt maturity. The average sales of the in our study are only $3 million per year. Most of our sample are retailers or service firms, rather than manufacturers. About one-half are not corporations, and virtually none are publicly traded.