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On the adjustment speed of SMEs to their optimal capital structure

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Abstract

The aim of this paper is to analyse the speed of adjustment of small and medium-sized enterprises (SMEs) to the target leverage. By applying a system GMM technique to Spanish panel data collected during the period 1995–2005, we estimate a partial adjustment model in which both target leverage and speed of adjustment are simultaneously endogenized. We provide empirical evidence on the determinants of target leverage and the speed of adjustment. More specifically, the rate of financial flexibility, growth opportunities and size are positively related to the speed of adjustment, whereas the distance to the optimal ratio of debt shows a negative impact. Our findings demonstrate that, in terms of sample mean, a high percentage of Spanish SMEs adjust rationally to their target. Additionally, the SMEs analysed appeared to be over-levered and fairly motivated to adjust (annual adjustment speed: 26%).

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Notes

  1. Since 1986 Spain has a second capital market (currently called “Alternative Stock Market”) aimed at small enterprises, although it has never worked very well. We presume that the high information costs of going public and the threat of losing control are at the core of the decision to enter the stock market.

  2. In order to avoid the “mask” effect produced by own extreme values, mean and standard deviation have been calculated without considering the lowest and highest ten values (Becker and Gather 1999).

  3. Small firms are defined as those having fewer than 50 employees and less than €10 million in sales or, alternatively, assets. Micro firms are those with fewer than ten employees and less than €5 million in sales or, alternatively, less than €2 million in assets.

  4. The set of instruments includes all possible lag levels as instruments in the first-differenced equation (referred to t − 2 year and the previous years for the lagged dependent variable and t – 1 year and the previous years for all the explanatory variables of both leverage and adjustment speed). Additionally, we include the lagged first-differences (as to t − 1 year) as instruments in the equation in levels.

  5. The factor default risk has also been proxied by the variable EBIT to interest costs, and the results remained the same (not reported).

  6. We have also estimated Eq. (6) by considering the speed of adjustment as a fixed variable; the results remain the same (lagged leverage coefficient 1 − µ equals 0.5837 and p value = 0). Full results are not reported.

  7. We have also tested our dynamic model [Eq. (6)] by taking the variable distance = |D * it  − D it−1| into consideration; that is, the difference between optimal leverage and observed leverage in the previous year (results are reported in the Appendix, Table 9). Using this definition, this variable is seen to have a significant and positive impact on SME speed of adjustment, all the rest remaining broadly similar.

  8. This percentage is the result of dividing 4246 (observations adjusting rationally) by 8167 (the total number of observations where µ can be obtained; that is, 9114 − 947).

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Acknowledgements

The authors would like to thank Almas Hesmati, Robert Blackburn, Julio Pindado and Félix López for valuable feedback and encouragement. Comments and suggestions from our Faculty colleagues Juan Sanchis and Emilio Farinos are also gratefully acknowledged. We are solely responsible for any remaining errors.

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Authors and Affiliations

  1. Departamento de Economía Aplicada, Facultad de Economía, Universitat de València, Valencia, Spain

    Cristina Aybar-Arias & Alejandro Casino-Martínez

  2. Departamento de Contabilidad, Facultad de Economía, Universitat de València, Campus de Tarongers, 46071, Valencia, Spain

    José López-Gracia

Authors
  1. Cristina Aybar-Arias
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  2. Alejandro Casino-Martínez
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  3. José López-Gracia
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Corresponding author

Correspondence to José López-Gracia.

Appendix

Appendix

See Tables 7, 8, 9.

Table 7 Description of variables
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Table 8 System GMM estimates of dynamic model [full results of Eq. (6)]
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Table 9 System GMM estimates of dynamic model (Eq. 6 with \( distance = \left| {D_{it}^{*} - D_{it - 1} } \right| \))
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Aybar-Arias, C., Casino-Martínez, A. & López-Gracia, J. On the adjustment speed of SMEs to their optimal capital structure. Small Bus Econ 39, 977–996 (2012). https://doi.org/10.1007/s11187-011-9327-6

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