The Determinants of Capital Structure - An Empirical Study of Differences between Swedish SMEs and Large Firms:

Abstract: The aim of this paper is to examine whether the determinants of capital structure affect Swedish SMEs and large firms differently. We use the theoretical framework of the static trade-off theory and the pecking order theory in order to establish our proxies for the unobserved firm characteristics. To empirically test our hypotheses we perform static panel data regressions on a decomposed leverage level, comprising the unobserved firm characteristics: effective tax rate, non-debt tax shields, risk, asset structure, size, age, growth opportunities and profitability. The results indicate that asset structure has a particularly strong influence on both SMEs' and large firms' borrowing decisions. In addition to asset structure, profitability, non-debt tax shields, risk and effective tax rate appears to be substantially more important for SMEs' borrowing behavior compared to large firms. In general our paper provides support for both the static trade-off theory and the pecking order theory.