Capital structure determinants of small and medium-sized enterprises: evidence from Central and Eastern Europe

Abstract

Purpose: The main aim of the paper is to examine the small and medium-sized enterprises’ (SMEs) capital structure determinants in Central and Eastern Europe (CEE) (Poland, Czechia, Slovakia, Hungary, Bulgaria and Romania). Design/methodology/approach: The authors used panel models to analyze financial data of 15,253 companies operating in the years 2014–2017. Findings: The authors confirmed the dominant role of firm-specific factors. Industry and country variables explain only 4% of debt variability of the surveyed companies. The direction of influence of the diagnosed firm-specific factors is consistent with the pecking order theory. About one-fourth of SMEs in CEE hold a stock of debt capacity. It negatively affects the share of debt in the capital. The authors did not confirm the influence of the systematic industry business risk. Research limitations/implications: The limitations of the study are (1) the inclusion of only six CEE countries in the sample; (2) the exclusion of microenterprises from the sample; (3) the capital structure relationships are observed following the applications of static panel; (4) the endogeneity issue has not been addressed in the model. Practical implications: This study shows that business-friendly institutional environment is an important factor influencing the indebtedness of companies. It increases the leverage and, consequently, the return on equity, especially in CEE countries. Originality/value: SME analyses in CEE countries are not as frequent as for other regions. Despite the classical determinants of the SMEs' capital structure, the authors have included debt capacity and systematic industry business risk in this study.