PAGO DEL IMPUESTO A LA RENTA

The capital structure decisions of firms, especially SMEs, have important implications for their performance, growth, risk of failure and potential for future development (Cassar, 2004). The inability to secure adequate sources of finance has been cited as the primary cause of SME failure (Coleman, 2000). It is therefore important to understand the entrepreneurial and business characteristics that determine the capital structure of SMEs. These factors are reviewed in sub-sections 3.3.1 to 3.3.2.

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According to Irwin and Scott (2010), the personal characteristics of the owner- manager influence the firm’s ability and likelihood of accessing finance. The entrepreneur’s financing decisions may be influenced by the strong desire to maintain business ownership and independence. To achieve this objective entrepreneurs prefer to use internal sources of capital (Abdulsaleh and Worthington, 2013) and reduce the use of external finance. Owners might perceive that any external providers of funds can interfere in the management of their business (Padachi et al., 2012). Characteristics such as owner’s education, experience and age are reviewed in the following section.

• Education and experience

Theoretically the educational background of the SME owner-manager is often used as a proxy for human capital and has been found to be positively related to the firm’s usage of leverage (Coleman and Cohn, 2002). In a study of SMEs owner-managed by men across the US between 1976 and 1986, Bates (1990) established that owner-managers with high levels of education were more likely to retain their firms operating throughout the period of study. Similarly, experience as measured by the number of years in an industry, has been found to enhance the availability of credit to SMEs (Cole, 1998). Empirical evidence indicates that prior experience of SME owner-managers in the industry is positively correlated with the share of external financing in the firm (Nofsinger and Wang (2011). In addition to that, the cumulative experience of entrepreneurs plays a significant role in mitigating problems like information asymmetry and moral hazard that hinder SME access to external finance. Therefore, the level of education and work experience provide the business with adequate human and social capital. According to Coleman and Cohn (2000), entrepreneurs with higher levels of formal education and business skills are more likely to source external finance.

• Owner’s age

Similarly, the age of the business owner is likely to influence the capital structure decision of SMEs (Romano, et al., 2001). Unlike younger entrepreneurs, older business owners are less likely to invest additional finance into their firms.

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Consequently, they are more reluctant to accept external ownership in the firm. Using data sets from the US and the UK, Vos, Yeh, Carter and Tagg (2007) affirm that younger owner-managers tend to use more bank credit than older entrepreneurs who appear to be more dependent on retained earnings

3.3.2 Business characteristics

The characteristics of SMEs also affect their financial decisions and ultimately the firm’s performance and growth. Corporate finance literature advocates for a number of factors that can be attributed to the cross-sectional variation in SME capital structure. These include firm size, age, asset structure, profitability, growth and risk (Abor and Quartey, 2010). This section provides an analysis of prior empirical literature on the most prominent factors that have been correlated to SME capital structure.

• Firm size

Size has been viewed as a determinant of a firm’s capital structure. A number of reasons could be listed that justify the inclusion of size indicators to the capital structure of the firm (Cassar, 2004). Firstly smaller firms find it costly to resolve information asymmetry problems with potential lenders, resulting in limited access to finance or financing only being available at a higher cost (Newman, Gunesse and Hilton, 2013). Consequently it becomes more efficient for small firms to use internally generated funds than external sources (Myers, 1984; Barbosa and Moraes, 2004). Information costs are lower for larger firms due to better quality of financial information in terms of accuracy and transparency (Daskalakis and Psillaki, 2009). Secondly small firms face higher transaction and interest rate charges than larger firms who have the advantage of economies of scale to the financial institution (Cassar, 2004). Since transaction costs are fixed, financing costs are inevitably more costly for smaller firms. Thirdly, SMEs are perceived to possess greater operating risk than larger firms, resulting in lending institutions charging them higher prices for the loans or equity investments (Ortqvist, Masli, Rahman and Selvarajah, 2006). Thus smaller firms have far higher risk of bankruptcy as they tend to fail more often than larger firms. At the same time larger firms have diversified streams of revenue and established operations, making them more prone to succeed in the long run. Therefore size is expected to be positively related to leverage.

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The empirical evidence regarding size as a possible determinant of firm leverage is mixed. On one hand, there is support for a positive relationship between firm size and capital structure of SMEs (Sogorb-Mira, 2005), while on the other hand some studies found a negative relationship in the short-run (Chittenden et al., 1996; Hall et al., 2004). These authors argue that small firms tend to depend mostly on equity while large firms are most likely to use debt. According to Newman et al., (2012) research conducted in developing countries has also established a positive relationship between firm size and measures of capital structure.

• Age of the firm

According to Abor and Biepke (2007) age is a standard measure of reputation and risk in capital structure models. Age plays a significant role on a firm’s ability to acquire debt. Older firms are deemed to be more stable, and thus more reputable due to their ability to survive over a longer period of time (Diamond, 1991). Therefore, the prediction is that older firms tend to have more long-term debt in their capital structures. Empirical work on the relationship between age of a firm and its use of external finance is mixed. Petersen and Rajan (1994:24) found a significant relationship between age and leverage of small firms. Similarly, Barton, Ned & Sundaram (1989:41) concluded that mature firms experience lower earnings volatility and hence are expected to have higher debt ratios. Hall et al., (2004) found a positive relationship between age and long-term debt but negatively related to short- term debt. This suggests that the reputational capital held by older firms is sufficient to ensure that risk of default bank credit is minimised. In Ghana, Abor and Biepke (2007) also found that age is positively related to debt, suggesting that age is an important factor influencing SMEs’ access to debt finance. The current study seeks to establish whether business age has any influence on the availability of bank credit for SMEs.

• Asset structure

The general consensus among researchers is that asset structure is directly related to leverage (Bester, 1985). However, due to conflict of interest between providers and shareholders, lenders face the risk of adverse selection and moral hazard. Therefore, lenders take action to protect themselves by requiring tangible assets. Collateral also provides a means to mitigate the risks of information asymmetry

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between lenders and borrowers (Besanko and Thakor, 1987) thereby limiting monitoring costs or any extra risk acceptance required by firms with unsecured positions (Newman, et al., 2013). Hence asset structure is likely to be positively associated with capital structure of small firms. Furthermore, in the event of bankruptcy, a higher proportion of tangible assets could enhance the salvage value of the firm’s assets (Stiglitz and Weiss, 1981). The lenders of finance are thus willing to advance loans to firms with a high proportion of tangible assets.

In general, empirical studies on SMEs in developed countries are in support of a positive association between asset structure and long-term leverage and a negative relationship between asset structure and short-term leverage (Chittenden et al., 1999; Cassar and Holmes, 2003; Sorgob-Mira, 2005). This emanates from the fact that small firms use internal sources of finance which do not require fixed assets as collateral in the short-term, while in the long-term, financing is secured against fixed assets (Newman, et al., 2013). Thus, assets function as guarantee in case of default (Harris and Raviv, 1991). Similarly, it has also been argued that collateral reduces adverse selection and moral hazard costs (Forte, Barros and Nakamura, 2013) for SMES with information asymmetry. Empirical evidence discussed so far provides strong support for the positive association between asset structure and leverage predicted by capital structure theorists. This is also evident for SMEs in developing economies as supported by studies in Ghana (Abor and Biepke, 2007) and in China (Huang and Song, 2006). It can be suggested that the firm’s asset structure influences its use of debt finance. Without tangible assets, the firm cannot access bank finance and has to look for alternative sources of finance.

• Profitability

According to Myers and Majluf (1984), a negative relationship should exist between firm profitability and leverage. The authors contend that firms that are more profitable will prefer to use retained earnings, and thus will have lower debt ratios. External financing is only sought when it is absolutely necessary. It has also been argued that firms with better past performance have lower default risk and consequently a higher debt capacity. However, the trade-off theory posits that, in order to take advantage of the interest tax shields associated with higher leverage, more profitable firms will have higher debt ratios. In addition, profitable firms prefer not to raise external equity

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in order to avoid potential dilution of control. Thus, an inverse relationship is expected between profitability and leverage.

A number of studies have tested the effect of profitability on firm leverage. The majority of empirical studies in the developed countries find evidence for the negative relationship suggested by Myers according to the pecking order theory. These include the works of Chittenden et al., 1996; Cassar and Holmes, 2003 and Sogorb-Mira, 2005. Likewise Abor and Biepke (2007) find a negative relationship for SMEs in South Africa and Ghana.

The evidence presented in the preceding discussion suggests that most small firms in both developed and developing economies follow a pecking order in their financing decisions. These findings confirm the predictions of Myers and Majluf (1984). In theoretical literature, profitability is measured as a ratio of earnings before interest and taxes (EBIT) to total assets. This then gives the impression that only unprofitable SMEs access bank finance.

• Growth prospects

Potential of business growth is another factor that influences the capital structure of small firms. The general consensus in the SME financing literature is that growth opportunities are negatively related to leverage, principally because future growth prospects are intangible and hence cannot be easily collateralised (Barclay and Smith, 2005). However, the effect of growth is dependent on the measure used to capture growth. Myers (1977) argues that firms with higher growth will have smaller proportions debt in their capital structure. In addition, high growth firms whose value comes from intangible growth opportunities do not want to commit themselves to debt servicing as their revenue may not be available when needed (Deesomsak, Paudyal and, Pescetto, 2004).

Empirical evidence seems inconclusive. According to Michaelas et al., (1999) future firm growth is positively related to leverage and long-term debt. With reference to South African SMEs, Abor and Biepke (2007) established that high growth prospects tend to entice more debt finance than those with low growth opportunities. This is evident in the positive relationship between long-term debt and the growth variable.

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However, Chittenden et al., (1996) and Esperanca, Ana & Mohamed (2003) found mixed results.

• Firm risk

The level of risk is said to be one of the primary determinants of a firm’s capital structure. According to Kim and Sorensen (1986), firms with high degree of business risk have less capacity to sustain financial risks, and thus use less debt. Theoretically, riskiness is expected to be negatively related to leverage. However, empirical evidence between risk and leverage for SMEs is limited and varied. Halov and Heider (2011) empirically examined the role of risk in the capital structure of firms. The authors argue that the traditional POT puts too much emphasis on the role of information asymmetry to explain financing decisions of firms. However, an important factor that has been ignored in the literature is the role of risk. SMEs face more severe information asymmetry problems than large and mature firms. But the POT fails to explain why small firms that are supposed to face more severe information asymmetry problems generally issue equity.

The legal form of the business also determines its financing decisions (Storey, 1994; Coleman and Cohn, 2000). Sole proprietors and partnerships are more likely to make use of internally generated sources of capital while companies and close corporations are more likely to make use of external funding since they exist as legal entities. Other factors that determine the capital structure of businesses include ratio of debtors to creditors, the nature of business operations (Cassar, 2004) and the economic sector they belong to (Harris and Raviv, 1991).

To summarise, the evidence documented suggests that firm specific characteristics such as size, age, profitability, asset structure, growth prospects and risk have an impact on firm financing. Firm profitability tends to be negatively related to leverage. However, with regards to size, the evidence is mixed with some studies reporting a positive association between size and leverage, while others suggest that a negative relationship exists. Asset structure appears to be positively correlated to leverage and growth prospects tend to be negatively related to debt. However, small businesses are characterised by information asymmetry problems resulting in high costs involved in resolving these challenges. Consequently, their choice and access to external finance is influenced by higher transaction costs than those of larger

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businesses. The larger the firm, the more established it is likely to be, and the lower the degree of information asymmetry it is likely to face. The high business risk and information asymmetry increase if firms are small in operational size. Therefore, it appears that SMEs have to rely more on short-term than long-term debt. In the light of the above discussion, the next section reviews the various sources of finance available to owner-managers of small businesses.