Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

Testing trade-off and pecking order theories financing SMEs

José López-Gracia and Francisco Sogorb-Mira
Small Business Economics
Vol. 31, No. 2 (August 2008), pp. 117-136
Published by: Springer
Stable URL: http://www.jstor.org/stable/40650934
Page Count: 20
  • Download ($43.95)
  • Cite this Item
Testing trade-off and pecking order theories financing SMEs
Preview not available

Abstract

This paper explores two of the most important theories behind financial policy in Smalland Medium-Sized Enterprises (SMEs), namely, the pecking order and the trade-off theories. Panel data methodology is used to test empirical hypotheses on a sample of 3,569 Spanish SMEs over a 10-year period dating from 1995 to 2004. Results suggest that both theoretical models help to explain SME capital structure. However, despite finding clear evidence that SMEs follow a funding source hierarchy (pecking order model), our results reveal that greater trust is placed in SMEs that aim to reach target or optimum leverage (trade-off model). This remains true even when SMEs take a long time to reach this level, due to the high transaction costs they have to face. Nondebt tax shields (NDTS), growth opportunities and internal resources all seem to play an important role in determining SME capital structure. Both size and age are also found to be significant factors. Moreover, the empirical evidence obtained confirms that SMEs clearly behave differently to large firms where financing is concerned.

Page Thumbnails

  • Thumbnail: Page 
[117]
    [117]
  • Thumbnail: Page 
118
    118
  • Thumbnail: Page 
119
    119
  • Thumbnail: Page 
120
    120
  • Thumbnail: Page 
121
    121
  • Thumbnail: Page 
122
    122
  • Thumbnail: Page 
123
    123
  • Thumbnail: Page 
124
    124
  • Thumbnail: Page 
125
    125
  • Thumbnail: Page 
126
    126
  • Thumbnail: Page 
127
    127
  • Thumbnail: Page 
128
    128
  • Thumbnail: Page 
129
    129
  • Thumbnail: Page 
130
    130
  • Thumbnail: Page 
131
    131
  • Thumbnail: Page 
132
    132
  • Thumbnail: Page 
133
    133
  • Thumbnail: Page 
134
    134
  • Thumbnail: Page 
135
    135
  • Thumbnail: Page 
136
    136