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Impact of firm characteristics on capital structure choice of Turkish SMEs

Ali Uyar (Department of Management, Fatih University, Istanbul, Turkey)
Mustafa Kemal Guzelyurt (KOSGEB (Small and Medium Enterprises Development Organization), Istanbul, Turkey)

Managerial Finance

ISSN: 0307-4358

Article publication date: 9 March 2015



The purpose of this paper is to investigate whether SMEs have a target debt ratio or not; who makes financing decisions for investments; the financing preferences; and which factors play a role in external financing policy of the firms.


The authors adopted questionnaire survey methodology in the study. The questionnaire was administered to SMEs operating in Istanbul through e-mail, telephone, and fax in July 2011. For the analysis, the authors have adopted the non-parametric test of the Kruskal-Wallis.


The study produced several important findings. Most of the surveyed firms do not follow a target debt ratio. Hence, the trade-off theory is not supported. Partners rather than professional managers are more likely to make financing choices in SMEs. The study has provided evidence regarding the implementation of the pecking order principle. Turkish SMEs primarily prefer internal funding sources over external ones and short-term debt over long-term debt. Thus, the pecking order theory is supported. General economic conditions, debt-paying ability of the firm, and financial distress risk play the most important role in outside financing decisions.

Research limitations/implications

The study has got some limitations as all such studies have. First, it was conducted only on SMEs in Istanbul; hence it has a geographical limitation. Second, the findings may not be generalizable to large and publicly traded companies as the sample consists of only SMEs. For further study, similar research can be carried out across Turkey on a wider sample.


The SMEs are different from large companies in a variety of ways, such as ownership structure, complexity of operations, financing sources, and so on. Hence, there is a need for empirical analysis conducted, particularly, on SMEs. The primary motivation for the study is the scarcity of such empirical works in general. Secondarily, SMEs make up a large proportion of companies in the Turkish economy. Therefore, the subject needs to be studied in Turkey.



The authors are grateful to Professor Mustafa Dilber for his valuable support in editing the paper.


Uyar, A. and Guzelyurt, M.K. (2015), "Impact of firm characteristics on capital structure choice of Turkish SMEs", Managerial Finance, Vol. 41 No. 3, pp. 286-300.



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