Capital Structure and Financing of Small and Medium Sized Enterprises: Empirical Evidence from a Sri Lankan Survey

Abstract

This paper presents an empirical examination of capital structure choices and financing of small and medium-sized enterprises (SMEs) in Sri Lanka. A survey was carried out based on 300 SMEs and the hypotheses formulated from pecking order and life cycle theories are tested on a number of univariate and multivariate logistic regression models. The results suggest that age, size, ownership structure, information asymmetry and level of intangible activity are important determinants of the capital structure of SMEs. It is evident that when firms become older and larger they accumulate enough fixed assets by eliminating informal asymmetry, they tend to acquire long term loans providing fixed assets as collaterals. The results also reveal that the industry-specific effects are important in the context of SME capital structures and SMEs in Metal and Wood industries are less likely to use internal finance while the SMEs in Textile industry are more likely to use long-term debts. The results support the Pecking Order Theory and the Life Cycle Theory.