What do we know about the capital structure of small ﬁrms?
Accepted: 22 June 2012 / Published online: 15 July 2012
Ó Springer Science+Business Media, LLC. 2012
Abstract Firm data from ten Western European
countries is used in this paper to contrast the sources of
leverage across small and large, as well as across listed
and unlisted ﬁrms. Speciﬁcally, the explanatory power
of ﬁrm-speciﬁc, country of incorporation institutional,
and macroeconomic factors is evaluated. Using data
that is more comprehensive in coverage than that used
in the existing research the stylized facts of the capital
structure literature for large and listed ﬁrms is
conﬁrmed, but contrasting evidence is obtained for
smaller companies. First, the country of incorporation
carries much more information for small ﬁrms,
supporting the idea that small ﬁrms are more ﬁnan-
cially constrained and face non-ﬁrm-speciﬁc hurdles
in their capital structure choice. Second, using two
different leverage measures it is shown that the
relationship of ﬁrm size and tangibility to leverage is
robust to the measure used for listed, but not for
Keywords Capital structure Á Small ﬁrms Á
Unlisted ﬁrms Á International evidence
JEL Classiﬁcations G10 Á G32 Á L25 Á L33 Á L26
Rajan and Zingales (1995) wrote a pioneering empir-
ical capital structure study using international data.
Since then a handful of papers in the ﬁeld have
emerged providing new evidence mostly based on
large listed companies.
By contrast, the current study
examines whether the capital structure ﬁndings from
large companies are portable for small companies.
Differences between large and small ﬁrms have been
pointed out in the ﬁrm growth literature. Evans (1987)
shows that small ﬁrms have higher growth rates than
large ﬁrms. More relevant to the study of capital
structure, Carpenter and Petersen (2002)showthatthe
growth of small ﬁrms is constrained by internal ﬁnance.
Therefore, it appears very important to explore the
capital structure of small ﬁrms as well as large ﬁrms.
Small ﬁrms are huge, when taken as a whole. The
European Commission and Eurostat (2001, p. 15) claim
that ﬁrms with less than 250 employees account for
two-thirds of all jobs and about half of the turnover of
the non-agricultural sector in the European Union.
Based on theoretical capital structure studies
we know that ﬁrm capital structure emerges from
three sources: ﬁrm-speciﬁc, country institutional, and
Management School, Queen’s University Belfast,
Belfast BT9 5EE, UK
This is largely due to the data availability. Stock market-listed
ﬁrms are required to report annual ﬁnancial records by law, and
usually the accounting standards for those ﬁrms across countries
are the same.
Small Bus Econ (2013) 41:479–501