The impact of the global financial crisis and the European sovereign debt crisis on the capital structure of firms in Europe: do SMEs, and listed firms respond the same?

Abstract

This study examines the evolution of the capital structure of European firms during the global financial crisis and European debt crisis. We compare the experiences of SMEs, listed firms and private firms in different industries and investigate the role of country and institutional factors in affecting capital structure. We find that SMEs, private firms, and non-listed firms experience lower declines in leverage relative to large firms during the global financial crisis and the European debt crisis. During these crises’ periods, SMEs experience steeper declines in debt maturity, which suggests reliance on short term debt that carries high roll over risks. This behaviour is protracted for firms in the agriculture industry. Both the global financial crisis and EU debt crisis have asymmetric effects on leverage, long term debt issuance and debt maturity across different industries, and across firms of different sizes. Moreover, in countries with more developed financial systems, stronger frameworks for insolvency, resolving firm insolvency, and strong systems for shareholder suits, and director liability, SMEs experience much lower reduction in leverage and debt maturity. This finding suggests that institutional factors help attenuate adverse capital supply shocks.