Capital structure and firm performance in European SMEs: Does credit risk make a difference?

Abstract

Purpose

The purpose of this paper is to investigate whether the relationship between capital structure and firm performance in small- and medium-sized enterprises (SMEs) is moderated by credit risk.

Design/methodology/approach

The authors empirically test whether an SME’s credit risk affects the SME’s relationship between capital structure and firm performance by using a 2012 cross-sectional sample of European SMEs from Austria, Belgium, Finland, France, Germany, Italy, Portugal, Spain, Sweden and the UK.

Findings

The empirical results suggest that in low credit risk SMEs, the debt ratio is negatively related to firm performance; however, this relationship is not present in high credit risk SMEs. Therefore, it is indicated that SME credit risk moderates the relationship between capital structure and firm performance.

Practical implications

The findings of the paper will enable financial managers to understand the importance of SMEs’ credit risk and will assist them in maximizing firms’ performance.

Originality/value

This paper extends the findings of previous studies by examining whether credit risk affects the relationship between capital structure and firm performance.

Citation

Li, K., Niskanen, J. and Niskanen, M. (2019), "Capital structure and firm performance in European SMEs: Does credit risk make a difference?", Managerial Finance, Vol. 45 No. 5, pp. 582-601. https://doi.org/10.1108/MF-01-2017-0018