ABSTRACT. This paper shows how the financial behaviour
of small and medium sized companies is influenced by size
and business sector. This idea underlies two research
approaches to capital structure: (i) credit rationing, and (ii) the
pecking order theory. Both approaches are based on asym-
metric information and have been widely developed over the
past two decades. An analysis has been carried out on 1000
Valencian companies that were randomly selected from the
state company registry. These companies were divided by size
before analysis. As an innovation, the investigation imple-
ments a multivariate MANOVA model that takes into account
two key variables in the financing of small and medium firms.
Our results show that size influences company self-financing
strategies, and that business sector influences short-term
The financial literature has extensively studied the
effect of financial restrictions on company growth
and investment plans in recent years. The finan-
cial behaviour of small companies, in particular,
has been discussed by Ang (1991, 1992), Gibson
(1992), Hall and Hutchinson (1993), Reid (1993),
Cosh and Hughes (1994), Robson et al. (1994),
Storey (1994), Chittenden et al. (1996), Hamilton
and Fox (1998) and Jordan et al. (1998). Much
research has recently been undertaken in Spain,
notably Hernando and Vallés (1992), Ocaña et al.
(1994), Maroto (1996), Boedo and Calvo (1997),
Estrada and Vallés (1998), and López-Gracia et al.
(1999). Small companies are especially affected
by imperfections in financial markets, and so
suffer a disadvantage in obtaining external funds
compared with larger companies. Given the impor-
tance of small companies in the economy, and
their social value in creating jobs, it is worthwhile
studying the reasons for their financial behaviour.
However, the principal aim of this work is not
to study the relationship between investment
decisions and financing in the realm of the small
and medium sized company. The objective is to
analyse the relevance of the two key factors in
determining the financial behaviour of small and
medium sized companies: their size, and the sector
in which they operate. Unlike other studies, which
have compared the financial behaviour of smaller
with larger companies, this study looks exclusively
at smaller companies – dividing them into three
ad hoc groups: micro, small and medium. We
hoped that this focus would find detailed differ-
ences in the strategies adopted by the different
groups. If such differences are revealed, then this
research could provide a solid basis for preparing
plans to help smaller companies. This may help
government efforts to encourage investment and
The paper is organised as follows. Section two
describes the theoretical basis of the investigation
and makes reference to relevant previous studies.
The third section analyses the statistical informa-
tion used, and then defines the relevant variables.
Section four goes on to specify the statistical
methodology that is used in the empirical analysis.
An Empirical Approach to the
Financial Behaviour of Small
and Medium Sized Companies
Small Business Economics 14: 55–63, 2000.
2000 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on October 20, 1999
Department of Accounting
Edificio Departamental Oriental
Facultad de Ciencias Económicas y Empresariales
Universidad de Valencia
Campus de Tarongers, s/n
Department of Applied Economics