Capital structure determinants of Turkish SMEs in manufacturing industry

Abstract

This thesis investigates the determinants of capital structure of small and medium sized enterprises (SMEs) from manufacturing sector in Turkey. Hypotheses about leverage decisions and debt maturity choices of firms are formulated based on the capital structure theories, mainly trade-off theory and pecking order theory. These hypotheses are tested using fixed effects model with unbalanced panel data set of 44,029 firm-year observations over the period between 1998 and 2008. I find that capital structure decisions of Turkish SMEs are in line with pecking order predictions. The results indicate that larger firms have higher leverage ratios; SMEs use their tangible assets to obtain long term debt; profits are used to decrease debt levels, particularly short term debt; firms with high growth opportunities prefer to finance their future growth with long term debt; rapidly growing firms use more short term debt to finance their growth. In general, SMEs are found to decrease their leverage ratio during the periods of economic growth. Lastly, although small and medium sized firms have significantly different debt ratios over the sample period, results are homogenous across both individual samples of small firms and medium firms.