The Dynamics of SMEs' Capital Structure and Performance : Evidence From a Panel VAR

We study the dynamics of the relationship between capital structure and performance of unlisted small and medium-sized enterprises (SMEs) in Germany. A panel vector autoregressive model allows us to account for potential endogeneity and individual heterogeneity. Our results show that there is a strong positive association between leverage and performance for small and medium-sized firms. However, we find no relation for micro-sized firms. While the smallest SMEs hence seem unable to seize the performance-enhancing effects of higher leverage, it appears important to keep credit restrictions at bay for larger SMEs