Capital Structure Determinants During the Sovereign Debt Crisis Period in Europe

What is it about?

his study investigates the speed of adjustment of the capital structure of small and medium capitalised firms in Europe before and during the sovereign debt crisis period. The sample includes 306 firms from 10 European countries comprising 2,142 firm-year observations for the period 2006 to 2013. After controlling the influence of firm-level, industry-level, and macroeconomic factors on debt levels, we report that small and medium capitalised firms have adjusted their capital structure during the sovereign debt crisis period and the speed of adjustment was quicker in non-stressed countries compared to the firms in the stressed countries. Our findings also show that the quality of countries’ institutional factors has significantly influenced the speed of adjustment of leverage of small and medium capitalised firms during the crisis period. Our findings suggest that the firm-level determinants of leverage for small and medium capitalised firms in Europe are; size and asset tangibility. Furthermore, the industry-level determinant is industry median leverage and macroeconomic-level determinants are GDP growth rate and inflation rate. The policy implications of the findings indicate that improving the country’s institutional environment (such as governance, rule of law, and corruption) will ease small and medium capitalised firms’ financial difficulties, which in turn facilitate their economic performance and resilience.

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Why is it important?

he findings of this study have policy implications for European countries and the European Commission. Since SMEs play an important economic and social role in society, implementing appropriate policies will ease the financial difficulties of SMEs’ and help boost SMEs’ performance, and in turn contribute to the economy, especially in the relatively less developed EU member states (like Greece). For SMEs to be able to obtain an optimal capital structure, the attitude of banks towards small-sized firms should change so that it is easier to access funds quickly to finance operations and capital expenditure. The government of member countries could also provide credit guarantees so that SMEs could easily adopt new technologies. Start-up companies require assistance with training and mentoring. Governments could facilitate an environment where new entrepreneurs can get the help needed. In addition, SMEs could be provided training/advice so that they can easily adopt new instruments such as factoring, leasing, venture capital financing, and fintech. This will enable SMEs to lower their short-term financing costs and also grow without burdening themselves with excess debt. Since profitability is negatively related to debt, a lower tax rate would help generate cash flows which could be used to finance immediate needs and enable SMEs to return to a comfortable level of capital structure. The policymakers could design and implement effective regulations, which balance financial stability, and investors’ protection and opens up new financing channels for SMEs.

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