What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance

Cole, Rebel (2008): What do we know about the capital structure of privately held firms? Evidence from the Surveys of Small Business Finance.

Abstract

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 female-owned 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
• Language: English
• Keywords: capital structure; pecking-order theory; small business; trade-off theory; SSBF
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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