Nuevos envases funcionales en productos cárnicos

The study presents a panel GMM model to explain firm characteristics and macroeconomic variables that affect capital structure of SMEs in the UK over the period of 1998-2008. Compared with similar studies this research not only examines the effects of determinants related firm characteristics, but also investigates the aspects of macroeconomic changes in making capital structure decisions and the speed of adjustment. We analyze whether the determinants of capital structure of SMEs are same for large firms and examine the determinants of target capital structure of firms and role of adjustment process. More specifically, lagged total debt ratio, firm size, profitability and FGO have a significant relationship with all measures of capital structure. Moreover, the lagged value of the dependent variable found to be a major determinant of capital structure. The result also suggest that the almost all the theories of capital structure are relevant to the SMEs in the UK.

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The key finding of this empirical relevance of the capital structure theory to the small business sector, carried out in this study suggest the results are also consistent with the prediction of the theory. This study estimated the speed at which firms adjust their capital structure and which shows that firm have long term target debt ratio and they adjust to the target ratio relatively fast.

In addition, this paper give evidence which suggest that the capital structure of small firms in UK is time dependent. The results show that time effects influence the total debt ratio of small firms as well as the maturity structure of debt raised by small firms. Furthermore, macroeconomic changes are also significantly affecting the capital structure of small firms and total debt ratio exhibit a positive relationship with macroeconomic variables.

Another important finding of this study is the size effect. When the firm becomes larger, they become more diversified and failure risk is reduced as they can access higher leverage. Information asymmetry makes small firms more difficult in accessing the external finance and they would face a higher interest cost. Moreover, these source of finance would be financially more risky and this would restrict small firms accessing debt finance and ultimately it will affect the growth of the small firm.

Macroeconomic factors seem to have important impact as firm level factors in determining capital structure. As country become richer firms continue to be financed by debt. The GDP growth rate and inflation has a huge effect on the leverage decision of the firm. Growth of the GDP provides better financial opportunities for especially for SMEs and this would increase the leverage.

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The study further confirm that small firms be likely to use retained profits as much as possible and then go for debt capital only when additional finance is essential. Hence we conclude that the estimated coefficients on the firm specific variables of size, profitability, operating risk, future growth and collateral assets are consistent with the explanation of the pecking order theory.

Besides the government policy makers and financiers have to recognize that the borrowing requirements of SMEs are not stable over time. Relatively there appear to be some variation in the borrowing needs of small firms that may be related to changes in the broader economic conditions of the marketplace. Therefore government policies of financiers may have to vary over time to match with the changing borrowing requirements of small firms.

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CHAPTER 4

DETERMINANTS OF COST OF DEBT OF SMEs IN THE UK.

4.1 Introduction.

The previous chapter focused on the capital structure decision of SME’s, while in this chapter attention is made to another crucial issue for SMEs namely the cost of debt capital. More specifically, the objective of this chapter is to empirically study the determinants of cost of debt of non- financial SMEs in the UK. Better understanding of cost of debt determinants should result in more accurate capital budgeting decision and create a better alignment between manager’s compensation and shareholder value creation. Evidence suggests that the vast majority of SME’s find it difficult to attract the levels of external finance required to fund the growth options (Binks and Ennew,1997). Cost of capital literature provides plenty of discussions of the determinants of cost of capital (Omran and Pointon,2004; Blass et al, 2004; Gregory and Rutterford,2001), but very little attention has been given to the cost of debt.

The objective of this study is to carry out an empirical testing using panel data methodology to determine the factors that explain the cost of debt in non- financial SMEs in the UK for period of 1998-2008.

We present some background information on the cost of debt in section 4.1. In section 4.2, we discuss the theoretical background of our study. In section 4.3 we review some of the empirical studies, we describe our model of cost of debt in section 4.4 and methodology in

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section 4.5. Dataset and other relevant information we presented in section4.6. In Section 4.7 we present summary statistics for the full sample and according to the various classification schemes we use and discuss our empirical results. Section 4.8 concludes.