Financial leverage and performance of smes in vietnam: Evidence from the post-crisis period

Abstract

This study examines the link between capital structure and firm performance (measured by ROA and ROE), focusing on a large sample of SMEs in Vietnam during the postcrisis period (2008-2016). SMEs are more exposed to risks than large firms and have very restricted access to external financing, thus limiting their growth and performance. Empirical results from various panel data models confirm the nonlinear relationship between debt financing and firm profitability. This relationship takes the form of an inverted-U shape. Firm profitability only increases to a certain level of leverage. When the debt ratio becomes too high, firm performance starts to decrease. These results highlight the role of financial distress costs in debt financing for SMEs. Furthermore, the paper also confirms the heterogeneity between state-owned firms and private ones. Policy implications are also discussed.