The purpose of this paper is to analyse if capital structure decisions of small- and medium-sized Portuguese firms are in accordance with the predictions of dynamic trade-off theory, more precisely, the speed of adjustment of short-term debt (STD) and long-term debt (LTD) towards the respective target debt ratios.
Based on two samples of Portuguese firms, 1,377 small-sized firms and 811 medium-sized firms, dynamic estimators were used for the treatment of data obtained from the Amadeus database for the period 2007-2011.
The results indicate that small- and medium-sized firms adjust their STD and LTD ratios towards the respective target ratios. Small- and medium-sized firms present a high-speed adjustment towards the target STD ratio, suggesting that both types of firm face costs of deviating from the target capital structure, which are, probably, greater than the costs of adjustment associated with STD. However, considering the distance from the target ratio as a determinant of the adjustment speed, the results show the predominance of the negative effect of the costs of adjustment on capital structure adjustment speeds.
The results obtained for the speed of adjustment of STD and LTD, in a recession context, show that for small firms and medium-sized firms, mainly for the former, the costs of external market transactions are prohibitively high, slowing the speed of adjustment towards the target capital structure.
The authors are pleased to acknowledge financial support from Fundação para a Ciência e a Tecnologia (grant UID/ECO/04007/2013) and FEDER/COMPETE (POCI-01-0145-FEDER-007659). The first author is pleased to acknowledge financial support from Santander Universities (BID/ICI/CSH – Management/Santander Universidades – UBI/2016). Finally, the authors would like to sincerely thank the editor and anonymous reviewers of the Journal of Small Business and Enterprise Development for their valuable comments and suggestions, which contributed to the improvement of the paper.
Sardo, F. and Serrasqueiro, Z. (2017), "Does dynamic trade-off theory explain Portuguese SME capital structure decisions?", Journal of Small Business and Enterprise Development, Vol. 24 No. 3, pp. 485-502. https://doi.org/10.1108/JSBED-12-2016-0193Download as .RIS
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