Determinants of corporate leverage and sustainability of small and medium-sized enterprises: The case of commercial companies in Ecuador

Abstract

This article studies the determinants of the capital structure of 2694 small Ecuadorian companies throughout their organizational life cycle, breaking down their total liabilities in long- and short-term leverage. The empirical investigation focuses on small and medium enterprises (SMEs) in the commercial sector, with 11,023 observations during the period 2015–2019. The results suggest both that information asymmetry and agency problems are important and that larger size and higher collateral are very important, for accessing long-term leverage financing. Liquidity is negatively associated with leverage, while higher profitability is positively associated with lower levels of leverage. When internal finances are insufficient, commercial SMEs appear to be highly dependent on short-term leverage financing, due to difficulties in accessing long-term leverage. The main conclusion of this study is that small companies' capital structure follows the predictions formulated by the main financing theories, in agreement with the results of previous studies of SMEs.