Credit supply and SME corporate capital structure in Finland: evidence from the financial crisis

Abstract

This paper tests how firm characteristics and credit supply fluctuations affect Small and Medium Enterprises (SME)'s external funding. This is done by doing empirical research on panel data consisting of 4990 Finnish SME during a time-period of 2002-2012, gathered from Voitto+ database. Analysis is done by researching the leverage ratio as a function of firm specific attributes, which are hypothesized by capital structure theories, and using them as controlling variables in order to find exogenous factors effect on yearly development of Finnish SMEs' capital structure.

Empirical part of the study utilizes fixed effect and logit regression models on panel data to test the hypotheses. Regression models include level model, where the explanatory variables are ratios of related to total assets of the firms. Second model used is difference model, where ratios of variables related to total assets are calculated as yearly differences between these ratios. Last model used is the logit model for funding decisions, where issuance of external capital is defined as overall change in capital between years being higher than threshold value of 1% of total assets in the previous year.

The results suggest a significant reduction of external debt during the years of financial crisis. Exogenous factors account for -1,05 percentage point reduction in the level of total debt to assets during the period of 2009-2012. Difference model shows a significant reduction during the years 2008-2009 for the amount of -1,3 percentage point of total leverage scaled by total assets. Latter is also supported by the logit model for capital issuances, which shows a -1,56% decrease in the probability of external debt issuance during the years 2008-2012 compared to the earlier years 2002-2007. Most of the determinants of the capital structure presented by capital structure theories appear to be relevant for the Finnish SMEs. Size, fixed tangible assets, growth opportunities and inventory seems to have positive relationship with leverage. Age, profitability, non-debt tax shields, effective tax rate and accounts payable have a negative relationship with debt. Profitability plays an important role in defining the amount of internal funds the company has available and it has a significant effect on capital issuance decisions by reducing the probability of external debt issuance for 13,6 percentage points of the total assets scaled profitability. Therefore, the results suggest that Finnish SMEs favor internally generated funds over external funds, which only strengthens if companies become more profitable. This applies for both, debt issuances and equity issuances. From the results for capital structure determinants and funding choices, Finnish SMEs seem to follow pecking order theory in their funding decisions.