Changes in Capital Structure of Czech SMEs: A Dynamic Panel Data Approach

In this paper, we explore two of the most relevant theories that explain financial policy in small and medium enterprises (SMEs): pecking order theory and trade-off theory. The theoretical section provides an overview of contemporary theories of capital structure. According to the pecking order theory changes in the level of debt are not motivated by the need to reach a given debt target, but instead are motivated by the need for external financing. In trade of theory companies identify their optimal capital structure and weigh up the advantages and disadvantages of an additional monetary unit of debt. Panel data methodology is used to test the empirical hypotheses over the sample of 260 Czech SMEs during the years 2004–2011 using annual data. To test pecking order theory and trade-off theory we use total debt ratio as a dependent variable and independent/explanatory variables depending on previous literature that that correspond to specific company characteristics. The results suggest that both theoretical approaches contribute to explain capital structure in Czech SMEs andidentify major forces that lie behind their indebtedness.