ARE REGIONAL INSTITUTIONAL FACTORS DETERMINANTS OF THE CAPITAL STRUCTURE OF SMES?

This paper analyses the role that institutional factors play in explaining differences in the capital structure of small and medium-sized enterprises (SMEs) across regions belonging to a single country. Specifically, it studies the effect of the development of the financial sector and of the economic situation on leverage of firms. Furthermore, the standard firm-factor determinants of debt, such as firm size, asset structure, profitability, growth, business risk and age are also incorporated. For this empirical study, we use a sample of 638 SMEs representing every Spanish region for the period 1999-2007, and apply the panel data methodology. This study makes several contributions towards research on capital structure. First, it is one of the first studies worldwide to show the influence of regional institutional factors on capital structure decisions for small and medium-sized firms. Previous single-country studies have only considered firm factors, and have failed to consider institutional factors. There is only one study of this nature covering a European country (the work of La Rocca et al. 2010, in Italy). Second, the choice of Spain as the country under study also adds value to this research in several ways. On the one hand, SMEs are unquestionably the leading actors in Spanish business. On the other hand, Spain exhibits certain regional heterogeneity. Our results suggest that the capital structure depends on the regional financial sector and the regional economic situation which implies that institutional factors at regional level help to better explain financing decisions of SMEs. These results are highly significant and should help policymakers understand the institutional origin of these regional differences and aid in their elimination. It makes no sense for these differences to persist within a single country when working at a European level towards the convergence of SMEs by improving, among other aspects, access to finance.