Análisis entre los principales servicios de las instituciones y necesidades de las

Hughes (1997) examine the balance sheet structure, gearing and profitability of non-financial data from UK companies for the period of 1987-1989 dividing the sample in to two as large and small companies. Due to the signaling problems associated with the equity issuing equity funding is more problematic for small firms and retained earnings and bank finance and also famous among small firms. He finds that small firms have low fixed to total assets ratio and more current liabilities. He further explains that manufacturing firms are more geared than non-manufacturing firms. Further this study concluded that the evidence for general equity or debt gaps in the UK is weak. It is considered to promote the seedcorn funding of SME co- operative or mutual guarantee schemes to reduce the information asymmetry in UK credit market.

The relationship between capital structure and strategy is explored by Jordan et al (1998) in the context of SMEs in the UK. The sample was extracted from 10 or less years old SMEs in the South East of England for the period of 1989-1993. In this study they have defined the SMEs as firms with less than 100 employees and less than £10 million turnover. This study use questionnaire method for data collection. The results of this research support the idea that there are certain financial variables play an important role in determining the capital structure of SMEs in the UK and support the aspects of a strategy-capital structure relationship which indicates that both strategic and financial factors are necessary to explain the chosen debt level. Further this study supports the notion that small firms adopt pecking order approach when funding their activities and variability in profits results in distress borrowing. It has

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been argued that owners of small firms are reluctant to give up the control and willing to finance expansion through internal funds, debt and equity respectively. However this is not consistent with Frank and Goyal (2003) where their sample provides more supports for the pecking order theory of large firms than small firms.

Using 3500 UK small firms which satisfy the SME definition for 10 years from 1986-1995 covering all ten industries in the UK Michealas et al(1999) find that most of the determinants of capital structure presented by the theory of finance appear indeed to be relevant to the UK small business sector. The results of this study analyse using Least Square Dummy Variable (LSDV) model. Size, age, profitability, growth opportunities, operating risk, asset structure, stock turnover and net debtors all seem to have an effect on the level of both short and long- term debt in small firms. Furthermore this study provides evidence which suggest that the capital structure of small firms is time and industry dependent.

Michealas et al(1999) show that most of the capital structure theories appear to be relevant for the SMEs in the UK and average short term debt ratios of SMEs in the UK appears to be increasing during the period of economic recession and decrease in the market place economic condition improves. Average long term debt ratio shows a positive relationship with the change in economic growth. The main conclusion of this study is that agency and asymmetric information cost have an effect on the level of both short and long term debt of small firms. They claim that since the cost of external equity may be higher for small firms than for large firms due to transaction cost, adverse selection and control considerations pecking order theory approach is particularly relevant for small firms.

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Panno (2003) finds that, for a sample of security issues by UK quoted companies 1992–1996, firms’ leverage is related to size, profitability, liquidity and the tax shield. This study investigate the capital structure choice of UK and Italian companies separately as these two countries have different financial systems he check how the market-based economy and bank-based financial market determine the capital structure choice. A descriptive model of choice is developed and estimated using Logit and Probit estimation procedure. The results show interesting difference between two financial markets and support the idea that UK market is more consistent with the recent development of capital structure principles. Further results show that size and profitability is positive and negative impact of liquidity and bankruptcy risk on financial leverage of companies. The negative effect displayed by the available reserves which are taken as a proxy of internally generated funds is consistent with the pecking order theory. Unlike in the UK optimal debt level does not seem to be a major concern in Italy. In both markets tax advantage of debt is important in determining capital structure decision.

In summary, these studies provide evidence suggesting that the capital structure of SMEs in UK is also affected by the similar factors to those in large firms and SMEs in other countries. However, they differ from the type of the debt use in the capital structure. These studies suggest that market for long run debt is not effectively functioning in small firms and small firms heavily depends on short term debt to avoid this problem. The common approach that has been used in the previous studies of capital structure is the static trade off model. In order to address the shortcomings of the static trade off model and as this model is unable to correctly describe the firms financing behaviour we use dynamic capital structure model.

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3.3 Dependent variable, Firm specific and macroeconomic variables that influence