Descendants of Financing Decision with Reference to Capital Structure: An Empirical Analysis of Indian SMEs

Abstract

The article attempts to address the descendants especially in case of small and medium enterprises (SMEs) who do business with humongous constraints and largely manage the functions with own skills rather than relying on theories of finance. The study gives a deep insight on the pattern of financing of listed SMEs in India based on the financial information of 428 SMEs and further analysis of financial statements being conducted by generating financial ratios and debt components during the year 2014–2018. The study has been conducted under the reference of different capital structure theories and results have found to be significant in line with the pecking order theory, that is, SMEs utilise profit to ease their debt level and emerging organisations deploy more debt since they require more funds. The startling observation comes in terms of size where SMEs are found to be relatively small and less dependent on external financing to increase the size of the company due to the negative relationship resulting from the analysis of all forms of debt, this result is in nonconformity with the other studies done on the SMEs of developed economies. Informational asymmetry prevails in the Indian SMEs due to smaller size and more control in the hands of few managers. Growth as a parameter has shown reliance on short-term debt for overall financing of the business operations. Overall, study concludes that financing condition of the SMEs in India is still in nascent stages and new avenues of financing must be explored to solve the problems of financing in India.