Capital structure of small, medium and micro enterprises: major factors for a developing economy
-
DOIhttp://dx.doi.org/10.21511/ppm.17(2).2019.09
-
Article InfoVolume 17 2019, Issue #2, pp. 124-133
- Cited by
- 2230 Views
-
625 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
Managing capital structure is an imperative decision made by all firms. The manner in which financing is organized is a strategic financial decision and managers must settle on the amount of debt in relation to equity that it requires to maintain. Despite many empirical studies investigating the choice of capital structure for large corporates, minimal research has been conducted on capital structure decisions in small, medium, and micro enterprises (SMMEs). This study identifies major factors influencing the capital structure of SMMEs in a developing economy and enlightens owners/managers on the importance thereof. This investigation used a quantitative research approach, which was cross-sectional. A convenience sampling method was adopted, and data were collected from 136 respondents, only confined to the retail and whole sector, which is the second largest sector in KwaZulu-Natal, South Africa. The partial least squares structural equation modelling was utilized to determine the statistical results. It was discovered that managerial factors such as individual goals and financing preference of the owner/manager, network ties, attitude to debt, maintaining control and asymmetric information; and firm-level factors such as size of the firm, profitability and firm age are major factors that influence the capital structure of SMMEs. Therefore, capital structure decisions are made motivated by the attitudes of the owners/managers.
- Keywords
-
JEL Classification (Paper profile tab)G32, L21, L25
-
References40
-
Tables2
-
Figures2
-
- Figure 1. Factors affecting financial decisions
- Figure 2. Factors likely to influence firm’s capital structure
-
- Table 1. Construct reliability and validity
- Table 2. Discriminant validity: Fornell-Larcker criterion
-
- Abeywardhana, Y. K. D. (2015). Capital structure theory and profitability: an empirical analysis of SME’s in the UK. Journal of Emerging Issues in Economics, 4(2), 1661-1675.
- Agwa-Ejon, J., & Mbohwa, C. (2015). Financial challenges faced by SMMES in Gauteng South Africa. In International Association for Management of Technology IAMOT 2015 Conference Proceedings (pp. 520-534).
- Bagozzi, R. P., & Yi, Y. (2012). Specification, evaluation, and interpretation of structural equation models. Journal of the Academy of Marketing Science, 40(1), 8-34.
- Bassey, N. E., Arene, C. J., & Okpukpara, B. C. (2014). Determinants of capital structure of listed agro firms in Nigeria. Economic Affairs, 59(1), 35-47.
- Borgia, D. B., & Newman, A. (2012). The influence of managerial factors on the capital structure of small and medium sized enterprises in emerging economies: evidence from China. Journal of Chinese Entrepreneurship, 4(3), 180-205.
- Bryman, A., & Bell, E. (2014). Research methodology: business and management contexts. Cape Town: Oxford University Press.
- Chipeta, C., & Deressa, C. (2016). Firm and country specific determinants of capital structure in Sub Saharan Africa. International Journal of Emerging Markets, 11(4), 649-673.
- Cole, R., & Sokolyk, T. (2017). Debt financing, survival and growth of start-up firms. Journal of Corporate Finance, 50, 609-625.
- Cotei, C., & Farhat, J. (2017). The evolution of financing structure in U.S. startups. The Journal of Entrepreneurial Finance, 19(1), 105-138.
- Donaldson, G. (1961). Corporate debt capacity: A study of corporate debt policy and the determination of corporate debt capacity. MA., Harvard University.
- Ebiringa, O. T. (2011). Synthesis on small and medium enterprise (SME) start-up financing. International Journal of Economy Research, 2(1), 85-95.
- Elomo, P. N. (2014). Determinants of capital structure of start-up firms in SA. MA., University of the Witwatersrand.
- Fornell, C., & Larcker, D. F. (1981). Evaluating Structural Equation Models with unobservable variables and measurement error. Journal of Marketing Research, 18(1), 39-50.
- Fourati, H., & Affes, H. (2013). The capital structure of business start-up: Is there a pecking order theory or a reversed pecking order? – evidence from the panel study of entrepreneurial dynamics. Technology and Investment, 4, 244-254.
- Gitman, L. J., Smith, M. B., Hall, J., Makina, D., Malan, M., Marx, J., Mestry, R., Ngwenya, S., & Strydom, B. (2016). Principles of Managerial Finance (2nd ed.). Cape Town: Pearson Education Limited.
- Gwatidzo, T., Ntuli, M., & Mlilo, M. (2016). Capital structure determinants in South Africa: A quantile regression approach. Journal of Economic and Financial Sciences, 9(1), 275-290.
- Handoo, A., & Sharma, K. (2014). A study of determinants in India. Indian Institute of Management Bangalore, 26, 170-182.
- Henseler, J., Ringle, C. M., & Sinkovics, R. R. (2009). The use of partial least squares path modeling in international marketing. In Rudolf, R., Sinkovics, Pervez N. Ghauri (Eds.). New Challenges to International Marketing. Advances in International Marketing, 20 (pp. 277-319). Emerald Group Publishing Limited.
- Hilgen, M. (2014). The impact of cultural clusters on capital structure decisions: evidence from European retailers (Working papers).
- Ibrahim, N., & Shiratuddin, M. F. (2015). Instruments for measuring the influence of visual persuasion: validity and reliability tests. European Journal of Social Sciences, 2(3), 25-37.
- Kraus, A., & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. The Journal of Finance, 28(4), 911-922.
- Mac an Bhaird, C., & Lucey, B. (2014). Culture’s influences: an investigation of inter-country differences in capital structure. Borsa Istanbul Review, 14(1), 1-9.
- Maina, L., & Ishmail, M. (2014). Capital structure and financial performance in Kenya: evidence from firms listed at the Nairobi securities exchange. International Journal of Social Sciences and Entrepreneurship, 1(11), 209-223.
- Matias, F., & Serrasqueiro, Z. (2017). Are there reliable determinant factors of capital structure decisions? Empirical study of SMEs in different regions of Portugal. Research in International Business and Finance, 40, 19-33.
- Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261-297.
- Mokuoane, M. (2016). Capital structure under different macroeconomic conditions: evidence from South Africa. M. Com., dissertation, Wits University.
- Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187-221.
- Nawi, H. M. (2015). Determinants of capital structure in small and medium-sized enterprises in Malaysia. D. Phil., Brunel University.
- Nirajini, A., & Priya, K. B. (2013). Impact of capital structure on financial performance of listed trading companies in Sri Lanka. International Journal of Scientific and Research Publications, 3(5), 35-43.
- Ogubazghi, S. K., & Muturi, W. (2014). The effect of age and educational level of owner/managers on SMMEs’ access to bank loan in Eritrea: evidence from Asmara City. American Journal of Industrial and Business Management, 4, 632-643.
- Onaolapo, A. A., Kajola, S. O., & Nwidobie, M. B. (2015). Determinants of capital structure: a study of Nigerian quoted companies. European Journal of Business and Management, 7(23), 170-183.
- Popoola, R. A. (2016). An analysis of capital structures of listed industrial companies in South Africa. M. Tech., Vaal University of Technology.
- Roca, J. C., Garcia, J. J., & De La Vega, J. J. (2009). The importance of perceived trust, security and privacy in online trading systems. Information Management and Computer Security, 17(2), 96-113.
- Sekaran, U., & Bougie, R. (2011). Research methods for business: a skill building approach (5th ed.). Chichester: John Wiley and Sons.
- Shin, D. H. (2009). An empirical investigation of a modified technology acceptance model of IPTV. Behavior and Information Technology, 28(4), 361-372.
- Silva, F. M. M. C. (2015). The impact of capital structure on startups’ growth. MA., University of Porto.
- Suki, N. M. (2011). A structural model of customer satisfaction and trust in vendors involved in mobile commerce. International Journal of Business Science and Applied Management, 6(2), 18-30.
- Taiwo, J. N., Falohun, T., & Agwu, M. E. (2016). SMEs financing and its effects on Nigerian economic growth. European Journal of Business, Economics and Accountancy, 4(4), 37-54.
- Thippayana, P. (2014). Determinants of capital structure in Thailand. Procedia – Social and Behavioral Sciences, 143, 1074-1077.
- Vo, X. V., & Ellis, C. (2016). An empirical investigation of capital structure and firm value in Vietnam. Finance Research Letters, 22, 90-94.