Cole, Rebel (2008): What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance.
Download (163Kb) | Preview
The capital-structure decision is one of the most fundamental issues in corporate finance. Numerous studies have been conducted to test the two major competing theories of capital structure (Trade-Off Theory and Pecking-Order Theory), yet none of these studies has analyzed the capital-structure decisions of small, privately held U.S. firms, which constitute the vast majority of all U.S. business enterprises. In this study, we provide the first evidence on this important issue, utilizing data from four nationally representative surveys conducted by the Federal Reserve Board: the 1987, 1993, 1998 and 2003 Surveys of Small Business Finances (SSBF). We find that firm leverage as measured by the ratios of total loans to total assets and total liabilities to total assets is negatively related to firm size, age, profitability, liquidity and credit quality and is positively related to firm tangibility and limited liability. In addition, we find that firm leverage is an increasing function of both the number of banks and the number of non-bank financial institutions with which the firm has business relationships. Finally, we find no significant variations in firm leverage by race or ethnicity, but some evidence that femaleowned firms use less leverage. In general, these results are broadly supportive of the Pecking- Order Theory and inconsistent with the Trade-Off Theory.
|Item Type:||MPRA Paper|
|Original Title:||What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance|
|Keywords:||capital structure; pecking-order theory; small business; trade-off theory; SSBF|
|Subjects:||L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Rebel Cole|
|Date Deposited:||04. Apr 2008 06:25|
|Last Modified:||12. Feb 2013 18:59|
Ang, J., Cole, R., Lin, J. (2000). Agency costs and ownership structure. The Journal of Finance 55, 81-106
Baker, M., Wurgler, J. (2002). Market timing and capital structure. The Journal of Finance 57, 1-32.
Berger, A., Udell, G. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking & Finance 22, 613- 673.
Bitler, M., Robb, A., Wolken, J. (2001). Financial Services Used by Small Businesses: Evidence from the 1998 Survey of Small Business Finances. Federal Reserve Bulletin, 87, 183-205.
Brealey, R., Myers, S., and Allen, F. (2006). Principles of Corporate Finance. McGraw Hill- Irwin (New York, NY).
Blanchflower, D., Levine, P., Zimmerman, D. (2003). Discrimination in the small business credit market. Review of Economics and Statistics 85, 930-43.
Cavalluzzo, K., Cavalluzzo, L. (1998). Market structure and discrimination: The case of small businesses. Journal of Money, Credit, and Banking 30, 771–792.
Chakravarty, S., Yilmazer, T. (2004). A multi-stage model of loans and the role of relationships. Purdue University working paper. Available at http://ssrn.com/abstract=519822.
Cole, R. (1998). The importance of relationships to the availability of credit. Journal of Banking & Finance 22, 959-997.
Cole, R., Goldberg, L., White, L. (2004). Cookie-cutter versus character: The micro-structure of small-business lending by large and small banks. Journal of Financial and Quantitative Analysis 39, 227-251.
Cole, R., Wolken, J. (1995). Financial services used by small businesses: Evidence from the 1993 National Survey of Small Business Finances. Federal Reserve Bulletin, vol. 81 (July), pp. 630-67.
DeAngelo, H., Masulis, R. (1980). Optimal capital structure under corporate and personal taxation. Journal of Financial Economics 8, 3-29.
Donaldson, G. (1961). Corporate debt capacity: a study of corporate debt policy and the determination of corporate debt capacity. Harvard Business School, Division of Research, Harvard University.
Elliehausen, G., Wolken, J. (1990). Banking markets and the use of financial services by small and medium-sized businesses. Federal Reserve Bulletin, Vol. 76 (October), pp. 801–817.
Fama, E., French, K. (1997). Industry costs of equity. Journal of Financial Economics 43, 153- 193.
Fama, E., French, K. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Studies 15, 1-34.
Faulkender, M., Petersen, M., (2006). Does the source of capital affect capital structure? Review of Financial Studies, 19, 45-79.
Fischer, E., Heinkel, R., Zechner, J. (1989). Dynamic capital structure choice: theory and tests. Journal of Finance 44, 19-40.
Flannery, M., Rangan, K. (2006). Partial adjustments toward target capital structures. Journal of Financial Economics 79, 469-506.
Frank, M., Goyal, V. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics 67, 217-248.
Frank, M., Goyal, V. (2004). Capital structure decisions: which factors are reliably important? UBC and HKUST Working Paper.
Frank, M., Goyal, V. (2006). Tradeoff and pecking-order theories of debt. In Eckbo, B. E. (ed.), Handbook of Corporate Finance: Empirical Corporate Finance (Handbooks in Finance Series, Elsevier/North-Holland), Chapter 7.
Graham, J. (2000). How big are the tax benefits of debt? The Journal of Finance 55, 1901-1941
Graham, J., Harvey, C. (2001). The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics 60, 187-243.
Greene, W. (2003). Econometric Analysis, 5th Ed. Upper Saddle River, Prentice Hall.
Halov, N., Heider, F. (2004). Capital structure, risk and asymmetric information. NYU Working Paper.
Hovakimian, A. (2006). Are observed capital structures determined by equity market timing? Journal of Financial and Quantitative Analysis 41, 221-243.
Hovakimian, A., Opler, T., Titman, S. (2001). The debt-equity choice: An analysis of issuing firms. Journal of Financial and Quantitative Analysis 36, 1-24.
Hovakimian, A., Hovakimian, G., Tehranian, H. (2004). Determinants of target capital structure: the case of dual debt and equity issues. Journal of Financial Economics 71, 517-540.
Huang, R., Ritter, J. (2005). Testing the market timing theory of capital structure. University of Florida Working paper.
Jalilvand, A., Harris, R. (1984). Corporate behaviour in adjusting to capital structure and dividend targets: an econometric study. The Journal of Finance 39, 127-145.
Ju, N., Parino, R., Poteshman, A., Weisbach, M. (2002). Horses and rabbits? Optimal dynamic capital structure from shareholder and manager perspectives. NBER Working paper 9327.
Kayhan, A., Titman, S. (2007). Firms’ histories and their capital structures. Journal of Financial Economics 83, 1-32.
Korajczyk, R., Levy, A. (2003). Capital structure choice: macroeconomic conditions and financial constraints. Journal of Financial Economics 68, 75-109.
Leary, M., Roberts, M. (2005). Do firms rebalance their capital structure? The Journal of Finance 60, 2575-2619 .
Leland, H. (1998). Agency costs, risk management, and capital structure, The Journal of Finance 53, 1213-1244.
Lemmon, M., Zender, J. (2004). Debt capacity and tests of capital structure theories. University of Utah and University of Colorado Working Paper.
Mach, T., Wolken, J. (2006). Financial services used by small businesses: Evidence from the 2003 Survey of Small Business Finances. Federal Reserve Bulletin. Vol. 92 (October) 167-194.
Marsh, P. (1982). The choice between equity and debt: an empirical study. The Journal of Finance 37, 121-144.
Mauer, D., Triantis, A. (1994). Interactions of corporate financing and investment decisions: a dynamic framework. The Journal of Finance 49, 1253-1277.
Modigliani, F., Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review 48, 655-669.
Myers, S. (1984). The capital structure puzzle. The Journal of Finance 39, 575-592.
Myers, S. (2001). Capital structure. Journal of Economic Perspectives 15, 81-102.
Myers, S., Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13, 187-221.
Rajan, R., Zingales, L. (1995). What do we know about capital structure: some evidence from international data. The Journal of Finance 50, 1421-1460.
Roberts, M. (2002). The dynamics of capital structure: an empirical analysis of a partially observable system. Duke University Working Paper.
Ross., S., Westerfield, R., Jaffe, J. (2004). Corporate Finance. 7th Edition. McGraw-Hill Irwin (New York, NY).
Shyam-Sunder, L., Myers, S. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of Financial Economics 51, 219-243.
Titman, S., Tsyplakov, S. (2004). A dynamic model of optimal capital structure. University of Texas Working Paper.
Welch, I. (2004). Capital structure and stock returns. Journal of Political Economy 112, 106-131.
Welch,I. (2007). Common flaws in capital structure research. www.ssrn.com/abstract=931675.
Available Versions of this Item
- What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance. (deposited 04. Apr 2008 06:25) [Currently Displayed]