The Impact of Capital Structure on Performance in SMEs: The Saudi Parallel Financial Market

Abstract

This study aims to analyse the effect of corporate capital structure on the financial performance of small and medium enterprises (SMEs). Despite the importance of SMEs for economic growth and technology advancements and the vital role of capital structure on financial performance, there is a scarcity of studies that investigate SMEs. This study focuses on SMEs that were listed in the Saudi Parallel Market (Nomu) for the period of 2017–2022. To the best of our knowledge, this is the first study that examines this relationship for Saudi SMEs. Our research utilises secondary data and employs descriptive statistics and Pooled OLS regression analyses. This study finds that the firm’s capital structure impacts its financial performance. In particular, we find that there is a positive significant relationship between total debt and return on equity. However, when we distinguish between long-term and short-term debt, we find that positive effect is mainly attributed to long-term rather than short-term debt. This study employs several robust tests. Based on the findings of this study, the authors provide several practical recommendations for corporate boards, executives, decision-makers, and regulators whose interest is the growth and sustainable performance of SMEs. KEYWORDS corporate finance, financial performance, leverage, Nomu exchange, Saudi firms, shareholder’s equity