To What Extent Do Regional Effects Influence Firms’ Capital Structure? The Case of Southern Italian SMEs’

Olivier Butzbach,Domenico Sarno

doi:10.3390/ijfs7010003

Olivier Butzbach, Domenico Sarno

Open Access

https://doi.org/10.3390/ijfs7010003

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Abstract

There is tremendous interest, in the economic literature, for the determinants of firms’ capital structure decisions. A rich body of empirical works now exists that purports to identify firm- and country-level factors affecting firms’ financing patterns. In addition, more recently, a new stream of studies has emerged that investigates cross-regional variation in small firms’ capital structure. While small firms’ leverage does seem to vary across regions, at least in countries where significant regional differences in economic and financial development and in the quality of institutions exist, not much yet is known about variation in debt maturity, in debt in relation to equity, and between different types of small firms. The present paper aims to fill this gap through an empirical analysis of cross-regional variation in the capital structure of a sample of about 30,000 Italian small firms over a 13-year period, including the aftermath of the credit crunch that followed the 2007–2008 global financial crisis. The findings confirm the view that small firms in underdeveloped regions are more financially constrained, but also amend some of the results shown in the literature, in particular by showing how small firms in Italy’s Southern regions have higher levels of equity and fixed assets than small firms in other regions.

Highlights

The determinants of firms’ capital structure is the object of a large component of economic literature, both empirical and theoretical
This paper aims to contribute to this emerging literature on cross-regional-variation in the capital structure of small firms in three ways: First, by using a very large sample of small and medium-sized firms (SMEs) during a relatively long period of time
The analysis proposed here relied on four specifications for the dependent variable, i.e., leverage (LEV): (1) Total financial debt/equity (TFD/EQU); (2) short-term financial debt/equity (SFD/EQU); (3) long-term financial debt/equity (LFD/EQU); and (4) total bank debt/equity (TBD/EQU)

Summary

Introduction

The determinants of firms’ capital structure is the object of a large component of economic literature, both empirical and theoretical. The empirical literature has largely confirmed the second set of hypotheses, e.g., those regarding the determinants of firms’ capital structure choices. A firm’s size is seen, in particular, as a very significant factor determining, for instance, a firm’s ability to access external finance—bank debt or marketable securities. This has to do, mainly, with the greater information asymmetries presented by small and medium-sized firms (SMEs). The literature widely confirms the hypothesis that profitable firms exhibit lower leverage; or that the greater a firm’s fixed assets, the greater its long-term debts (Rajan and Zingales 1995; Wald 1999; Booth et al 2001). Regarding the first set of hypotheses, the jury is still out: Several studies find evidence in favour of the pecking order theory (REF); others do not (see, for instance, Fama and French 2002); others yet find evidence compatible with both the pecking order theory and alternative theories (La Rocca et al 2011)

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