JRF 04 2015 0040

The Journal of Risk Finance
Capital structure dynamics among SMEs: Swedish empirical evidence

Darush Yazdanfar Peter hman
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Darush Yazdanfar Peter hman , (2016),"Capital structure dynamics among SMEs: Swedish
empirical evidence ", The Journal of Risk Finance, Vol. 17 Iss 2 pp. 245 - 260
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Capital structure dynamics Capital

structure
among SMEs: Swedish dynamics
empirical evidence
Darush Yazdanfar and Peter hman 245
Department of Business, Economics and Law,
Received 24 April 2015
Centre for Research on Economic Relations, Mid Sweden University, Revised 1 September 2015
Sundsvall, Sweden 13 October 2015
Accepted 29 November 2015
Abstract
Purpose This paper aims to empirically investigate the existence of dynamic capital structure
among small and medium-sized enterprises (SMEs) across their life cycle stages.
Design/methodology/approach The analysis examined a sample of 15,952 SMEs across five
industry sectors for the 2009-2012 period. Several techniques, including ANOVA and multivariate
regressions, were used to analyse firm-level data.
Findings The findings suggest that start-up SMEs, on average, rely on equity capital, and that the
level of equity capital increases as firms age. The short-term debt level is particularly high in early life
cycle stages, decreasing later on. The long-term debt ratio is positively related to firm age, although it
is low in all life cycle stages investigated.
Practical implications The findings may help several parties, including firm owners, to better
understand how capital structure can be related to various life cycle stages. Such an understanding may
help these actors use financial resources efficiently.
Originality/value To the authors best knowledge, little research has addressed whether there are
any differences in financing patterns over the firm life cycle.
Keywords Capital structure, SMEs, Debt financing, Life cycle stages
Paper type Research paper
1. Introduction
The importance of small and medium-sized enterprises (SMEs) for economic growth is
well established, and capital availability is considered a precondition for SME
investment and survival (Carpenter and Petersen, 2002; Beck et al., 2005; Fagiolo and
Luzzi, 2006; Hutchinson and Xavier, 2006; Oliveira and Fortunato, 2006). At the same
time, financing constraints are regarded as a main barrier to firm growth (Holtz-Eakin
et al., 1994; Chittenden et al., 1996; Cooley and Quadrini, 2001; Becchetti and Trovato,
2002; Reid, 2003). As documented by Mach and Wolken (2011), credit-constrained SMEs
are significantly more likely to exit the market than are unconstrained ones. In the same
vein, Rajan and Zingales (1995) found that firms with better access to external capital
grow faster, and Coad et al. (2013) argued that the ability to obtain external financing is
an important factor in firm development.
The existence of financial constraints among SMEs has been explained by capital The Journal of Risk Finance
market imperfections (Stiglitz and Weiss, 1981). High costs related to information Vol. 17 No. 2, 2016
pp. 245-260
asymmetry and moral hazard agency conflicts often force small businesses to use Emerald Group Publishing Limited
1526-5943
capital generated internally (Myers, 1984, 2001; Carpenter and Petersen, 2002). DOI 10.1108/JRF-04-2015-0040
JRF According to Irwin and Scott (2010), firms suffer from information asymmetry and
17,2 agency conflict costs primarily during the start-up stage because of their lack of track
records. Accessing debt financing is therefore a challenge for small businesses at this
early stage (Barton and Matthews, 1989; Hamilton and Fox, 1998). In particular, small
start-up firms typically experience more difficulties than do their larger and older
counterparts in accessing initial debt capital (Cavalluzzo and Cavalluzzo, 1998;
246 Cavalluzzo et al., 2002; Blanchflower et al., 2003). In addition, Klapper et al. (2010)
demonstrated that younger businesses tend to rely far less on bank loans than do older
firms.
Serrasqueiro and Nunes (2012) and Martin and Daniel (2013), among others, suggest
that firm age is an influential factor affecting firms access to external capital.
Simultaneously, it is suggested that the relationship between firm age and capital
structure is still largely unexplored and warrants further attention (Coad et al., 2013;
Mac an Bhaird and Lucey, 2014). Previous studies have used various samples, methods
and measures, but they have seldom compared firms in the earliest life cycle stages. In
response to calls for further studies, and to the fact that financing behaviour is context
dependent, the present study contributes to the capital structure life cycle literature in
several ways. Although the global financial crisis has highlighted the importance of
firm debt ratios, few empirical studies of capital structure dynamics have been
performed since 2009. To the authors best knowledge, the present study is one of the
largest empirical investigations of capital structure life cycle among SMEs using a
relatively recent and longitudinal data set and several univariate and multivariate
statistical techniques. The study investigates differences in financing patterns among
firms across six life cycle stages. In line with previous research, this study also considers
other firm characteristic variables (i.e. firm size and industry affiliation). For example,
Mac an Bhaird and Lucey (2010) identified a relationship between firm size and debt
capital availability, and Mac an Bhaird and Lucey (2014) found that differences in
industry affiliation influence firms financing patterns.
The remainder of the paper is organized as follows. Section 2 presents the theoretical
framework, previous empirical studies and hypotheses. Section 3 outlines the data
sample, variables and specification of the binary logistic regression model. The
empirical results are reported in Section 4, and Section 5 concludes the paper.
2. Theoretical framework, previous empirical studies and hypotheses

Firms change steadily over their life cycle stages, determined by both internal and
external factors (Anthony and Ramesh, 1992). Of particular importance is that firms
needs and access to financing sources vary over these stages (Berger and Udell, 1998;
Frielinghaus et al., 2005).
Several theories have been developed to explain the financing behaviour of firms.
The static trade-off theory developed by Modigliani and Miller (1958) is one of the
earliest capital structure theories. This theory is based on the assumption that there is an
optimal target debt-to-value ratio associated with trade-offs among the effects of the tax
benefits of borrowing, bankruptcy costs and agency costs (Myers, 1977, 1984). Thus,
firms endeavour to achieve the target optimal debt ratio at which the costs and benefits
of debt capital are equal (Fama and French, 2002). According to pecking order theory, a
firms characteristics, not least its age, are linked to its capital structure (Myers, 1984).
Firms tend to prioritize internal sources of funding, such as retained earnings (Timmons
and Spinelli, 2004). If the retained earnings are less than the investments planned and Capital
further capital is required, firms choose low-risk debt and hybrids, such as convertibles structure
and equities, only as a last resort. Empirical studies have confirmed that young firms
main source of capital is internal. If the amount of capital is insufficient, they use
dynamics
short-term debt (STD) (Garca-Teruel and Martnez-Solano, 2007; La Rocca et al., 2011).
Reasons for the use of internal rather than external financing sources are differences in
the average cost of capital and the owners desire to maintain control of the firm 247
(Chittenden et al., 1996). Firms may choose external capital sources if they believe that
the total cost of accessing it is lower than that of internal sources or if they have no other
alternatives.
A main explanation of pecking order theory is the notion of information asymmetry
between borrower and lender, which leads to costly monitoring procedures (Myers and
Majluf, 1984). This information asymmetry is particularly bothersome for young firms
because they have no or a limited loan history (Whited and Wu, 2006). As firms age, they
are likely to acquire reputations (Diamond, 1989; Berger and Udell, 1998; Nico and Van
Hulle, 2010), better lender borrower relationships (Sakai et al., 2010) and lower
transaction and monitoring costs (Rajan and Zingales, 1995). From such a perspective,
debt levels should increase with firm age (Petersen and Rajan, 1994).
Although the empirical evidence is fairly limited, it has been concluded that a firms
age plays a significant role in its access to external capital sources (Cassar, 2004; Beck
et al., 2005; Beck and Demirg-Kunt, 2006; Oliveira and Fortunato, 2006; Dickinson,
2011; Serrasqueiro and Nunes, 2012).
Romano et al. (2000) studied the capital structure decisions of a sample of Australian
family businesses. In agreement with pecking order theory, the results suggest that
family firms rely mostly on internally generated funds, such as owner capital and
capital from other management members. The findings also indicate that firm size and
family control significantly influence the firm debt ratio, and that older business owners
prefer less equity capital (EQ) than do younger business owners. Vieira (2014)
investigated the capital structure of 58 Portuguese firms for the 1999-2010 period. The
results indicate that the sampled family firms use more external debt financing than do
non-family firms. The results also indicate a positive relationship between family
businesses age and their debt ratio.
Ngoc et al. (2009) examined the impact of several explanatory variables, including
age, on credit access among 230 Vietnamese SMEs. As indicated by their findings,
young SMEs often found it difficult and expensive to finance their operations by bank
loans due to information asymmetry and high collateral requirements. Klapper et al.
(2010) and Woldie et al. (2012) argued that firms active for under four or five years,
respectively, rely on bank loans to a relatively small extent. Bougheas et al. (2005)
investigated a sample including more than 14,000 manufacturing firms in the UK
covering the 1999-2000 period. The authors suggested that young SMEs face a higher
risk of business failure than do older firms. The findings also indicate that younger
firms possess less expertise and a shorter success history than do older firms, making it
more difficult for them to access adequate bank loans.
Gregory et al. (2005) analysed a sample of 954 SMEs in the USA covering the
1994-1995 period. Their findings suggest that younger firms use more external
financing sources than do older ones. The authors argued that older firms are more
likely than younger ones to accumulate retained earnings to finance their investments.
JRF Lpez-Gracia and Snchez-Andjar (2007) used several statistical techniques to analyse
17,2 a sample of 3,569 Spanish SMEs covering the ten years from 1995 to 2004. Their results
indicate that age has a significantly negative effect on the use of debt financing. This
confirmed previous findings regarding Scottish firms that the debt ratio of small
businesses decreases over time (Reid, 2003). Mac an Bhaird and Lucey (2010)
investigated 299 Irish SMEs and demonstrated that age is an important factor
248 explaining a firms choice of capital structure. Their findings indicate that firms rely less
on debt with greater age, as they increasingly tend to use retained earnings as financing.
In an extended study, Mac an Bhaird and Lucey (2014) analysed a data set comprising
79,862 observations of a sample of SMEs operating in 13 countries over a seven-year
period. The results confirm a negative relationship between firm age and debt financing.
Using life cycle stage as a point of departure, Berger and Udell (1998) argued that
firms tend to rely increasingly on bank loans as they grow from infancy to
adolescence, but that they use less bank borrowing as they become older. La Rocca
et al. (2011) suggested that small Italian firms tend to have a high debt ratio in early life
cycle stages, but that this proportion decreases in subsequent life cycle stages as the
firm accumulates retained earnings. Yazdanfar (2012) tested the applicability of
financing life cycle theory on a sample of more than 21,000 Swedish micro firms. The
results suggest that, regardless of an increase in firm debt capacity, the sampled firms
relied more on EQ over their life cycle.
Mac an Bhaird and Lucey (2011) tested hypotheses derived from pecking order and
agency theories. The authors divided the sampled firms into six age categories to
investigate the pattern of financial growth. The results suggest that firms capital
structure is related to their age categories, and that financing patterns change across the
firms life cycle stages. To compare age categories, Serrasqueiro and Nunes (2012)
studied the impact of firm age on debt level among 495 young and 1,350 old SMEs in the
1999-2006 period. The findings provided evidence that firm age plays a role in
explaining the debt level in the sample, the young SMEs on average having higher STD
than did their older counterparts. At the same time, the young SMEs on average had
lower long-term debt (LTD) than did the older ones. Snchez-Vidal and Martin-Ugedo
(2012) investigated the applicability of the financing/growth cycle to Spanish SMEs
using a sample of 5,944 observations from 2007. The authors suggested that younger
firms tend to use proportionally more STD than do older ones. Tian et al. (2015) used
panel data covering 1,485 manufacturing firms in China for the 1999-2011 period to
examine the relationship between life cycle stage and capital structure. The results
suggest a dynamic capital structure across firm life cycle stages. Total debt (TD)
followed a U-shaped pattern, meaning that the debt ratio decreases until a revival stage
begins, when it then increases.
The empirical findings presented above are somewhat contradictory. On the one
hand, firms track records may improve over time, making external funding more
likely for older firms. On the other hand, firms retained earnings may increase over
time making internal funding more likely for older firms. Taken together, and in line
with the findings of Berger and Udell (1998), Mac an Bhaird and Lucey (2010), La
Rocca et al. (2011) and Snchez-Vidal and Martin-Ugedo (2012) that older SMEs on
average had lower debt ratios than did younger ones, the following hypothesis is
formulated:
H1. Older SMEs rely less on debt capital than do younger ones.
Based on the review of previous studies, two control variables, i.e. size and industry Capital
affiliation, are included in the present study, and the following hypotheses are structure
formulated:
dynamics
H2. The size of SMEs is related to their financing pattern.
H3. The industry affiliation of SMEs is related to their financing pattern.
H2 is based on Rajan and Zingales (1995), Chittenden et al. (1996), Cassar (2004), 249
Lpez-Gracia and Snchez-Andjar (2007) and Mac an Bhaird and Lucey (2010). H3 is
based on Myers (1984), Harris and Raviv (1991), Talberg et al. (2008), Snchez-Vidal and
Martin-Ugedo (2012) and Mac an Bhaird and Lucey (2014).
3. Data sample, variables, data analysis and model specification

3.1 Data sample
The present study is based on Swedish data. The Swedish economy is a small,
export-oriented open economy (Swedish Central Bank, 2013) in which SMEs play a vital
developmental role. There are over one million businesses in Sweden, and nearly 97 per
cent of them are SMEs with fewer than ten employees (Statistics Sweden, 2014).
The sample was obtained from the commercial database Affrsdata. The data set
consists of all active, unlisted, non-financial Swedish limited liability firms with fewer
than 200 employees, and the present sample includes SMEs in five industries for the
2009-2012 period. As the data set is based on financial statements involving potential
problems, such as outliers or missing data, firms with missing data, negative values, no
employees or involved in a bankruptcy process were excluded. The final sample
included 15,952 SMEs. Section 4.1 provides a summary of the descriptive statistics.
3.2 Variables, data analysis and model specification

STD, LTD and EQ are the dependent variables, and firm age is the main independent
variable. As in several previous studies, debt capital is defined as debt repayable within
and beyond one year (Chittenden et al., 1996). In agreement with previous studies
(Petersen and Rajan, 1994; Chittenden et al., 1996), firm age is measured as the number
of years a firm has existed. In line with Mac an Bhaird and Lucey (2011), the SMEs were
classified into six life cycle stages (i.e. age categories) as follows: age category 1, 5
years; age category 2, 6-10 years; age category 3, 11-15 years; age category 4, 16-20 years;
age category 5, 21-25 years; and age category 6, 25 years. Tam et al. (2001) and
Yazdanfar and hman (2015) have implemented these six age categories in
investigating the relationship between firm age and growth. The first of the two control
variables, firm size, is measured as the natural logarithm of sales (cf. Yazdanfar and
hman, 2015). The industry categorization is based on Swedish standard industry
classification codes. Firm industry affiliation was applied using sector dummies at the
one-digit level.
To test the hypotheses, several analyses were performed. The ANOVA and
correlation analyses were performed to test which capital structure variables STD,
LTD and EQ were significantly related to the main independent variable, age category.
To investigate whether the independent variables explain the change in the capital
structure variables, multivariate regression was used.
The estimation equation in the multivariate regression analysis is as follows:
JRF Y1 a1 b11(X1) b21(X2) b31(X3) e1
17,2 Y2 a2 b12(X1) b22(X2) b32(X3) e2
Y3 a3 b13(X1) b23(X2) b33(X3) e3
Y4 a4 b14(X1) b24(X2) b34(X3) e4
Where,
250 Y1 STD, debt repayable within one year in percentage of total assets;
Y2 LTD, debt repayable beyond one year in percentage of total assets;
Y3 TD in percentage of total assets;
Y4 EQ in percentage of total assets;
a1, a2, a3, a4 constants;
X1 life cycle stages (i.e. age categories): age category 1, 5 years; age
category 2, 6-10 years; age category 3, 11-15 years; age category 4,
16-20 years; age category 5, 21-25 years; and age category 6, 25
years;
X2 size of SMEs, the natural logarithm of sales;
X3 industry dummy (coded as: 1 retail sector, 2 metal sector, 3
consulting sector, 4 health care sector and 5 construction sector);
and
e error term.
4. Empirical results
4.1 Descriptive analysis
Table I presents the descriptive statistics for the key characteristics of the sampled
firms. The firms included belong to the retail (45 per cent), metal (18 per cent),
consulting (16 per cent), healthcare (11 per cent) and construction (10 per cent)
industry sectors. Comparing the five groups, construction firms tend, on average, to
have the highest level of STD, while firms operating in the metal sector account for
the highest level of LTD. On average, firms operating in the healthcare industry tend
to have the lowest TD ratio and firms in the construction industry the highest. The
ANOVA results indicate significant differences in the debt variables across
industry sectors at the 1 per cent level. Moreover, the sampled SMEs are, on average,
characterized by an age of nearly 20 years and approximately seven employees
each.
4.2 The pattern of financing across age categories

Table II shows the mean values and standard deviations of the financing sources used
by SMEs in different life cycle stages. Table II also presents the ANOVA results
regarding the financing sources, i.e. STD, LTD and EQ, at the 1 per cent significance
level. Although the financing sources are used to some degree, it can be observed that
the mean value of the EQ ratio is higher than the corresponding mean values of the debt
financing sources in each of the six life cycle stages, indicating that EQ is the main
financing source irrespective of age.
The EQ ratio is, on average, lowest in the first life cycle stage (56.3 per cent). It
increases to its highest level (60.8 per cent) in the fifth stage, and then slightly decreases
to 59.4 per cent in the sixth stage. The STD ratio is highest in the first stage (38.7 per
No. of
Capital
Industry STD LTD TD EQ Age employees Size structure
Retail dynamics
Mean 0.37 0.07 0.44 0.56 21.63 7.91 5.30
SD 0.16 0.12 0.17 0.17 15.24 13.84 0.00
No. of
observations
No. of firms
28,652
7,163
28,652
7,163
28,652
7,163
28,652
7,163
28,652
7,163
28,652
7,163
28,652
7,163
251
% firms 0.45 0.45 0.45 0.45 0.45 0.45 0.45
Metal
Mean 0.32 0.09 0.41 0.59 23.8 13.6 3.94
SD 0.15 0.13 0.172 0.17 14.99 20.95 0.57
No. of
observations 11,232 11,232 11,232 11,232 11,232 11,232 11,232
No. of firms 2,808 2,808 2,808 2,808 2,808 2,808 2,808
% firms 0.18 0.18 0.18 0.18 0.18 0.18 0.18
Consulting
Mean 0.35 0.04 0.38 0.62 16.38 3.76 3.38
SD 0.17 0.10 0.18 0.18 11.32 7.62 0.39
No. of
observations 10,144 10,144 10,144 10,144 10,144 10,144 10,144
No. of firms 2,536 2,536 2,536 2,536 2,536 2,536 2,536
% firms 0.16 0.16 0.16 0.16 0.16 0.16 0.16
Healthcare
Mean 0.21 0.04 0.25 0.75 15.28 3.24 3.41
SD 0.11 0.08 0.13 0.14 9.48 6.13 0.35
No. of
observations 7,180 7,180 7,180 7,180 7,180 7,180 7,180
No. of firms 1,795 1,795 1,795 1,795 1,795 1,795 1,795
% firms 0.11 0.11 0.11 0.11 0.11 0.11 0.11
Construction
Mean 0.38 0.08 0.46 0.54 19.25 7.00 3.69
SD 0.17 0.12 0.17 0.17 12.57 13.62 0.56
No. of
observations 6,600 6,600 6,600 6,600 6,600 6,600 6,600
No. of firms 1,650 1,650 1,650 1,650 1,650 1,650 1,650
% firms 0.10 0.10 0.10 0.10 0.10 0.10 0.10
Total
Mean 0.34 0.07 0.41 0.59 20.22 7.63 4.31
SD 0.17 0.12 0.178 0.20 14.11 14.38 0.92
No. of
observations 63,808 63,808 63,808 63,808 63,808 63,808 63,808
No. of firms 15,952 15,952 15,952 15,952 15,952 15,952 15,952
ANOVA
F 1510.0** 477.2** 2039.8** 6255.8** 698.4** 887.7** 89741.3**
ANOVA
Table I.
Sig. 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Mean, standard
Notes: STD short-term debt; LTD long-term debt; TD total debt; EQ equity capital; Age the average age of the deviation and
sampled firms; Number of employees the average number of employees in the sampled firms; Size the natural logarithm number of firms
of sales; * and ** indicate significance at the 0.05 and 0.01 levels, respectively (2009-2012)
JRF Life cycle stages STD LTD TD EQ Size
17,2
First stage
Mean 0.387 0.050 0.437 0.563 4.085
SD 0.167 0.101 0.176 0.176 0.994
No. of observations 6,148 6,148 6,148 6,148 6,148
252 Second stage
Mean 0.360 0.057 0.417 0.583 4.328
SD 0.167 0.108 0.195 0.177 0.933
Third stage
Mean 0.343 0.067 0.410 0.590 4.404
SD 0.168 0.116 0.201 0.181 0.916

Fourth stage
Mean 0.321 0.073 0.394 0.606 4.286
SD 0.161 0.120 0.201 0.178 0.885
Fifth stage
Mean 0.318 0.074 0.392 0.608 4.288
SD 0.160 0.121 0.201 0.177 0.886
Sixth stage
Mean 0.327 0.074 0.401 0.599 4.774
SD 0.164 0.123 0.193 0.178 0.834
Total
Mean 0.338 0.068 0.406 0.594 4.380
SD 0.166 0.117 0.199 0.178 0.923
ANOVA
F 227.9** 67.7** 2039.8** 641.0** 641.0**
ANOVA
Sig. 0.0000 0.0000 0.0000 0.0000 0.0000
Notes: STD short-term debt; LTD long-term debt; TD total debt; EQ equity capital; Size
Table II. the natural logarithm of sales; first stage (age category 1), 5 years; second stage (age category 2), 6-10
Summary of years; third stage (age category 3), 11-15 years; fourth stage (age category 4), 16-20 years; fifth stage (age
descriptive statistics category 5), 21-5 years; and sixth stage (age category 6), 25 years; * and ** indicate significance at the
(2009-2012) 0.05 and 0.01 levels, respectively
cent), after which it decreases to its lowest level (31.8 per cent) in the fifth stage.
Compared with the other financing sources, LTD is low across all life cycle stages,
though it increases slightly across the stages. Comparing STD and LTD, one can
conclude that the former is significantly higher than the latter in all age categories.
Moreover, the results indicate that the sampled firms grow in size with age, and that the Capital
financing ratios and size differ significantly between life cycle stages. structure
dynamics
4.3 Correlation analysis
Pearson correlation analysis was performed to investigate the relationships between the
variables. As indicated by Table III, there is a negative and significant relationship
between life cycle stage (i.e. age category) and STD (R 0.115; p 0.000). On average,
253
older firms are less likely to use STD than are younger ones. In contrast, older firms tend
to use more LTD than do younger ones (R 0.068; p 0.000). In total, older firms are
less likely to use debt than are younger ones (R 0.063; p 0.000). As can be
observed, the relationship between STD and LTD is significantly negative, indicating
that they are substitutes for each other.
Table III also shows that there is a positive and significant relationship between firm
size and the debt variables, implying that smaller firms on average are less likely to
finance their operations with STD or LTD than are larger firms. The Pearson correlation
results further suggest a positive and significant correlation between firm age and size.
The results indicate low correlations between the independent variables implying that
the risk of multicollinearity is low.
4.4 Results of the multivariate regression

The results of the multivariate regression in Table IV indicate that the independent
variables are significant in explaining the change in the dependent variables STD,
LTD, TD and EQ at the 1 per cent significance level. The finding that the age category
is significantly and negatively related to STD and TD implies that these two ratios
decrease with firm age. On the other hand, the age category is positively and
significantly related to LTD and EQ, indicating that these two ratios increase with firm
age. While the results indicate a positive and significant relationship between size and
the variables STD and TD, they also suggest a negative and significant relationship
between size and EQ and no relationship between size and LTD. Finally, the results
confirm relationships between industry and the ratios of STD, LTD, TD and EQ at the
1 per cent significance level, indicating that the general pattern of capital structure
across the age categories remains similar across industry sectors. Taken together, the
empirical results provide evidence supporting H1, H2 and H3.
The F-tests examine the overall robustness of the model, confirming that the
independent variables significantly affect the dependent variables. The diagnostic tests
of the models, including the DurbinWatson and variance inflation factor tests, provide
further evidence of the robustness of the results.
The findings indicate that firm age influences the use of financing sources. Age
category plays a significant role in explaining differences in firms capital structures.
The sampled SMEs rely on EQ and STD financing in their early stages. While the EQ
and LTD ratios tend to increase across the life cycle stages, the STD ratio tends to
decrease. The negative relationship between firm age and debt capital supports H1 and
is in line with previous studies with a similar focus (Petersen and Rajan, 1994; Berger
and Udell, 1998; Lpez-Gracia and Snchez-Andjar, 2007; La Rocca et al., 2011;
Snchez-Vidal and Martin-Ugedo, 2012; Tian et al., 2015). Consistent with H2 and H3,
the SME financing pattern is influenced by size and industry affiliation, confirming
JRF
17,2
254
Table III.
between the
relationships
analysis of the
Pearson correlation
variables (2009-2012)
Life cycle
Variables stage STD LTD TD EQ Size
Life cycle stage

Correlation 1 0.115** 0.068** 0.063** 0.121** 0.150**
Sig. 0.000 0.000 0.000 0.000 0.000
No. of observations 63,808 63,808 63,808 63,808 63,808 63,808
STD
Correlation 0.115** 1 0.234** 0.773** 0.390** 0.166**
Sig. 0.000 0.000 0.000 0.000 0.000
LTD
Correlation 0,068** 0.234** 1 0.436** 0.256** 0.059**
Sig. 0.000 0.000 0.000 0.000 0.000
TD
Correlation 0.063** 0.773** 0.436** 1 0.528** 0.192**
Sig. 0.000 0.000 0.000 0.000 0.000
EQ
Correlation 0.121** 0.390** 0.256** 0.528** 1 0.133**
Sig. 0.000 0.000 0.000 0.000 0.000
Size
Correlation 0.150** 0.166** 0.059** 0.192** 0.133** 1
Sig. 0.000 0.000 0.000 0.000 0.000
Notes: STD short-term debt; LTD long-term debt; TD total debt; EQ equity capital; Size the natural logarithm of sales; * and ** indicate
significance at the 0.05 and 0.01 levels, respectively
Dependent Independent Standard No. of Durbin

variable variables Coefficient error t Pt observations Parms RMSE R2 F P VIF Watson
STD Stage 0.014 0.0003 37.60 0.000** 63,808 4 0.16094 0.056 1,252.255 0.0000 1.024 1.838
Size 0.025 0.0007 31.16 0.000** 1.331
Industry 0.013 0.0005 23.11 0.000** 1.315
Constant 0.321 0.0046 69.81 0.000**
LTD Stage 0.004 0.0002 14.26 0.000** 63,808 4 0.11558 0.018 387.1777 0.0000 1.024 1.971
Size 0.001 0.0005 1.79 0.074 1.331
Industry 0.011 0.0004 26.59 0.000** 1.315
Constant 0.086 0.0033 25.90 0.000**
TD Stage 0.011 0.0004 25.50 0.000** 63,808 4 0.17268 0.068 1,554.113 0.0000 1.024 1.843
Size 0.023 0.0008 27.84 0.000** 1.331
Industry 0.025 0.0006 39.33 0.000** 1.315
Constant 0.406 0.0049 82.40 0.000**
EQ Stage 0.011 0.0004 25.01 0.000** 63,808 4 0.18236 0.158 3,981.936 0.0000 1.024 1.654
Size 0.017 0.0009 19.76 0.000** 1.331
Industry 0.067 0.0006 99.07 0.000** 1.315
Constant 0.742 0.0052 142.53 0.000**
Notes: STD short-term debt; LTD long-term debt; TD total debt; EQ equity capital; * and ** indicate significance at the 0.05 and 0.01 levels,
respectively
(2009-2012)
Table IV.
255
dynamics
structure
Capital
regression analysis
multivariate
results of the
Summary of the
JRF previous findings, for example, of Talberg et al. (2008) and Mac an Bhaird and Lucey
17,2 (2010, 2014).
5. Concluding remarks
This paper empirically examines hypotheses drawn from pecking order theory
256 regarding the impact of firm age on capital structure. Given that the accessibility and
employment of capital are main preconditions for SME investment, growth and
survival, this study focuses on how SMEs use financing sources, debt capital in
particular. Significant differences were found in the use of financing sources between
the six age categories investigated (cf. Mac an Bhaird and Lucey, 2011). Overall, older
firms tend to rely less on debt capital than do younger ones. This may be because older
firms realize opportunities to use internal financing sources more than do their younger
counterparts (Gregory et al., 2005; Mac an Bhaird and Lucey, 2010; Yazdanfar, 2012).
Due to costs related to agency conflicts, SME owners and managers prefer to be
autonomous and retain control over their firms. They therefore follow a hierarchy (i.e.
pecking order) in using capital, preferring internal capital to external capital sources.
When focusing on differences between STD and LTD, the present study suggests
different patterns depending on firm age. While younger SMEs have higher STD ratios
than do older ones, older SMEs have higher LTD ratios than do their younger
counterparts. These patterns support previous findings (Serrasqueiro and Nunes, 2012).
In line with Mac an Bhaird and Lucey (2011), this study suggests that the life cycle
model provides an adequate theoretical framework for describing capital structure
dynamics, and that firm age is a determinant of the financing pattern. The underlying
assumption is that the financing patterns of firms change constantly through several
development stages. At the same time, SME financing patterns seem to be influenced by
size and industry affiliation.
The present findings can be used for a range of purposes, including to improve our
understanding of SME financing behaviour across different stages of the firm life cycle.
Creditors and policy makers may find the results useful in coordinating SME financing
support in the earliest life cycle stages, when firms may have particular difficulties in
obtaining external financing (Cavalluzzo et al., 2002; Blanchflower et al., 2003; Klapper
et al., 2010). Firm owners can apply the present findings to develop strategies to use
financial resources more efficiently and to avoid financial distress.
This study is, admittedly, associated with a number of limitations. The data sample
consists only of SMEs operating in a particular socio-economic context. As a result, the
findings cannot be generalized to firms operating in other contexts. It seems particularly
relevant to suggest further studies in various socio-economic contexts, not least because
Hall et al. (2004) and Mac an Bhaird and Lucey (2014) note that country differences are
major determinants of firm financing patterns. In addition, the present study is based on
the mean debt values and equity ratios of firms. In fact, reality is more complicated than
the situation captured by mean values, and financing at the individual firm level may
differ from the results presented here. The results should therefore be treated with
caution, and not be applied beyond the scope of this study. Due to data limitations, the
present study considered only a few firm-level variables. Future studies could therefore
consider other variables such as collateral and internal financing sources. Moreover,
Romano et al. (2000) and Irwin and Scott (2010) suggest that the characteristics of firm
founders may affect a firms opportunities to access external capital.
Despite the limitations of this study, it supplements the literature by finding that Capital
older firms tend to use less debt capital than do younger firms. Further studies of this structure
topic are encouraged. In line with Yazdanfar and hmans (2015) suggestion, studies dynamics
using the firm life cycle as a starting point could productively focus on both financing
sources and firm profitability.
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About the authors

Darush Yazdanfar is Associate Professor (PhD) of Business Administration at Mid Sweden
University and Centre for Research on Economic Relations. His research interests are corporate
finance, the stock market, risk management and entrepreneurial finance.
Peter hman is Professor (PhD) of Business Administration at Mid Sweden University and
Centre for Research on Economic Relations. His research interests are accounting, auditing,
banking and property. Peter hman is the corresponding author and can be contacted at:
peter.ohman@miun.se
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This article has been cited by:
1. hmanPeter Peter hman peter.ohman@miun.se Peter hman (PhD) is a Professor of Business

Administration at Mid Sweden University and the Centre for Research on Economic Relations. His
research focuses on accounting, auditing, banking and property issues. YazdanfarDarush Darush
Yazdanfar darush.yazdanfar@miun.se Darush Yazdanfar (PhD) is an Associate Professor of Business
Administration at Mid Sweden University and Centre for Research on Economic Relations. His
research focuses corporate finance, the stock market, risk management and entrepreneurial finance.
Department of Business, Economics and Law, Mid Sweden University, Sundsvall, Sweden . 2017.
Short- and long-term debt determinants in Swedish SMEs. Review of Accounting and Finance 16:1,
106-124. [Abstract] [Full Text] [PDF]

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Capital structure dynamics among SMEs: Swedish empirical evidence

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Capital structure dynamics Capital

2. Theoretical framework, previous empirical studies and hypotheses

3. Data sample, variables, data analysis and model specification

3.2 Variables, data analysis and model specification

4.2 The pattern of financing across age categories

% firms 0.18 0.18 0.18 0.18 0.18 0.18 0.18

No. of observations 8,684 8,684 8,684 8,684 8,684

4.4 Results of the multivariate regression

Life cycle stage

Dependent Independent Standard No. of Durbin

internal debt, European Financial Management, Vol. 16 No. 3, pp. 345-373.

About the authors

1. hmanPeter Peter hman peter.ohman@miun.se Peter hman (PhD) is a Professor of Business

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