Journal of Small Business & Entrepreneurship

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The capital structure dynamics of European listed

SMEs

Dimitris Kenourgios, Georgios A. Savvakis & Theofanis Papageorgiou

To cite this article: Dimitris Kenourgios, Georgios A. Savvakis & Theofanis Papageorgiou
(2020) The capital structure dynamics of European listed SMEs, Journal of Small Business &
Entrepreneurship, 32:6, 567-584, DOI: 10.1080/08276331.2019.1603946

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JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP
2020, VOL. 32, NO. 6, 567–584
https://doi.org/10.1080/08276331.2019.1603946

The capital structure dynamics of European listed SMEs

Dimitris Kenourgiosa, Georgios A. Savvakisa and Theofanis Papageorgioua,b
a
Department of Economics, National and Kapodistrian University of Athens, Athens, Greece; bSchool
of Applied Mathematics and Physics, National Technical University of Athens, Athens, Greece

ABSTRACT ARTICLE HISTORY

This article investigates the capital structure dynamics of European Received 28 November 2018;
SMEs by assessing the impact of firm-specific, institutional, and accepted 22 March 2019
macroeconomic factors over the period 2005–2015, including the
KEYWORDS
European Sovereign Debt Crisis (ESDC). In this setup, we perform
financial leverage; listed
a dynamic panel data analysis, along with several model specifica- SMEs; firm categories;
tions and robustness tests on listed SMEs of EU-28, dividing them European sovereign debt
into firm categories (micro, small, and medium) and country crisis; dynamic
groups (core, periphery, high technology, and new EU member panel analysis
countries). We find that the effect of capital structure determinants
do not differ significantly across size and country groups. The

MOTS-CLES:
results suggest that profitability, asset structure, and size have influence financiere; PME
been the driving forces of listed SME’s leverage, regardless of the cot
ees; crise de la dette
size of the companies and the country group. At a macroeco- souveraine europ
eenne
nomic and institutional level, taxation is the most significant vari-
able for all the subgroups. Finally, the ESDC seems to increase the
leverage of the listed SMEs in the periphery and the new member
states countries, leaving the core countries practically unaffected.

ABSTRAIT
Cet article examine la dynamique de la structure de capital des PME
europ
eennes en
evaluant l’impact des facteurs propres aux entre-
prises, institutionnels et macro
economiques, pendant la p
eriode
2005–2015, y compris celle de la crise de la dette souveraine euro-
p
eenne. Dans cette configuration, nous proc
edons a une analyse de
donn
ees de panel, ainsi qu’a des tests de sp
ecification et de robus-
tesse de plusieurs modeles sur des PME cot
ees dans les 28 pays de
l’UE, en les divisant par cat
egories d’entreprises (micro, petites et
moyennes) et par groupes de pays (centraux, p
eriph
eriques, a la
pointe de la technologie, et nouveaux
Etats membres de l’UE). Nos
r
esultats r
evelent que les effets des d
eterminants de la structure de
capital ne different pas de maniere significative d’un type d’entre-
prise ou d’un groupe de pays a l’autre. Ils suggerent
egalement que
la rentabilite
, la structure des actifs et la taille sont les forces motri-
ces de l’influence des PME cot
ees, ind
ependamment de la taille des
entreprises et du groupe de pays. Aux plans macro
economique et
institutionnel, la fiscalit
e est la variable la plus significative pour tous
les sous-groupes. Enfin, la crise de la dette souveraine europ
eenne
semble accro^ıtre l’influence des PME cot
ees dans les pays
p
eriph
eriques et les nouveaux
Etats membres, laissant les pays cen-
traux pratiquement non-affect
es.

CONTACT Dimitris Kenourgios dkenourg@econ.uoa.gr Department of Economics, National and Kapodistrian

University of Athens, 1 Sofokleous Str, Athens, 10559, Greece
ß 2019 Journal of the Canadian Council for Small Business and Entrepreneurship/Conseil Canadien de la PME et de l’entrepreneuriat
568 D. KENOURGIOS ET AL.

1. Introduction
The role of SMEs in the European economy is critical. SMEs represented 99.8% of all
enterprises excluding the nonfinancial business sector and contributed about 67% of
employment and 57% in terms of value for 2016. According to the Annual Report on
European SMEs (Annual Report on European SMEs 2016/2017 2017), SMEs
remained the principal creator of new jobs after the sovereign debt crisis, while for
the same period large companies downsized and reduced their employment rates.
Conversely, the determinants of SMEs’ capital structure may display several differen-
ces across EU countries and across different market conditions. This study investi-
gates the capital structure dynamics of European SMEs by taking into account
microvariables and macrovariables, the effect of the European crisis and possible dif-
ferences per size and country group.
The importance of SMEs in the economy has led academic research toward the
determinants of SMEs’ performance. According to the existent literature (eg
Daskalakis, Balios, and Dalla 2017), SMEs financing exhibits considerable differences
compared to large enterprises. Put it differently, there are always obstacles for smaller
businesses to raise sufficient external finance to meet their needs. At the same time,
the fact that there is no universally used measure of leverage (Welch et al. 2011)
hampers the estimation of capital structure determinants. The vast majority of the lit-
erature focus on the capital structure determinants of the SMEs for a single country
(Sogorb-Mira 2005; Dasilas and Papasyriopoulos 2015; Kumar and Rao 2016; Van
Hoang et al. 2018). Other research studies revolve around the differences in the deter-
minants of SMEs’ capital structure among countries and across macroeconomic states
(Hall, Hutchinson, and Michaelas 2004; Psillaki and Daskalakis 2009; J~ oeveer 2013;
Daskalakis, Balios, and Dalla 2017; McNamara, Murro, and O’Donohoe 2017; Li,
Niskanen, and Niskanen 2018).
This article investigates empirically the relationship between the listed SMEs’ cap-
ital structure and several determinants for the EU-28 countries over the period
2005–2015. For that purpose, we perform a dynamic panel data analysis, along with
several model specifications and robustness tests, and focus exclusively on European
listed SMEs, divided into three different subgroups: micro, small, and medium enter-
prises. To account for heterogeneity issues, the analysis is also performed at subsam-
ples of countries within the EU-28, such as the core, periphery, high technology, and
new EU member countries.
This article contributes to the existing literature in several ways. First, it focuses
only on SMEs publicly traded in Europe. Leverage behavior of large listed companies
or nonlisted SMEs has been extensively examined in the literature, but research based
solely on public SMEs is scarce (Huang, Boateng, and Newman 2016).1 Second, it
models separately the capital structure driving factors of different firm categories
(micro, small, and medium), according to the European Union common criterion,
using a dynamic panel threshold methodology with several model specifications to
provide robust results. From previous studies, it is hard to conclude about the influ-
ence of the determinants of capital structure among the subgroups of SMEs because
empirical evidence is relatively scarce, produce conflicting results and is characterized
by differences in the applied methodologies.
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 569

Third, it focuses on firm data from all European countries, namely the EU-28
group, for which the evidence is limited. To provide further evidence from a country
perspective, we also distinguish between four subsamples: core, periphery, high tech-
nology, and the new member countries. In addition, external macroeconomic factors
are also taken into account, since macroeconomic states have a prevailing effect on
the relationship between capital structure determinants and leverage (Daskalakis,
Balios, and Dalla 2017). Finally, we focus on the impact of the European Sovereign
Debt Crisis (ESDC) on SMEs’ financial leverage. Although, there are several studies
analyzing the impact of the global financial crisis on SMEs’ capital structure (Amon
and Dorfleitner 2013; McGuinness and Hogan 2016; Hirigoyen and Basly 2018; Van
Hoang et al. 2018), our study is one of the first, to the best of our knowledge, to test
for the effects of the ESDC on European listed SMEs’ capital structure decisions.
Our findings suggest that the determinants of the capital structure do not differ
significantly among subgroups of the listed SMEs. Leverage, proxied either by total
liabilities to total assets or total debt to total assets, demonstrates a negative relation-
ship to profitability and a positive relation to asset structure and size over the sample
period, regardless of the size of the companies and the country group. Among macro-
economic and institutional variables, taxation is the most significant variable for all
subgroups, while GDP growth is found significant only for the medium SMEs.
Finally, we find that a positive relationship exists between the European sovereign
debt crisis and SMEs’ leverage for all country subgroups except for the core, suggest-
ing that the financing gap between the core and the rest of the EU countries
has increased.
The rest of the article is structured as follows. Section 2 presents a literature review
and the hypotheses to be tested. Section 3 introduces the data, whilst section 4 dis-
cusses the methodology. Section 5 discusses the results. Finally, section 6 sums up the
conclusions.

2. Literature review and testable hypotheses

After the seminal work of Modigliani and Miller (MM 1958 and 1963), capital struc-
ture decisions have been a key research area in the field of modern financial econom-
ics. Thereafter, several approaches have been developed, mainly based on the
relaxation of the MM theory assumptions.
Optimal capital structure of the firm is achieved through balancing debt’s benefits,
such as tax shield, and through the negative effects that debt may induce, such as
financial distress (Myers 1977; Harris and Raviv 1991). Furthermore, higher free cash
flows for the firm should lead to higher profitability and increased agency costs of
equity, so a higher level of debt should be used to discipline management behavior.
Although, the agency costs of equity in SMEs could be less meaningful compared to
large companies, our sample is composed of listed companies, so a positive relation-
ship between debt and profitability is expected; Nunkoo and Boateng (2010) find a
positive relation between leverage and profitability for Canadian firms listed on the
Toronto Stock Exchange.
570 D. KENOURGIOS ET AL.

Pecking order theory, initially introduced by Myers (1984) and Myers and Majluf
(1984), reckons that firms will prefer internally generated funds to finance new proj-
ects. If financing gap still exists, firms will prefer to issue external debt rather than
issue new equity. Thus, more profitable firms that generate higher earnings should
use less debt than less profitable firms. Debt is preferred because debt issues are
regarded as a positive signal by investors who possess less information than manag-
ers, while quite the opposite holds for new equity issuing. In addition, managers of
SMEs tend to be the main shareholders as well, so since debt does not dilute equity,
it should be chosen. Sogorb-Mira (2005), Daskalakis and Psillaki (2008), and Van
Caneghem and Van Campenhout (2012) find a negative relationship among leverage
and profitability for nonlisted SMEs of specific European countries during the late
‘90s and early 2000s. Based on the above discussion, there could be either a positive
or a negative relation between leverage and firm’s profitability. So, our first hypoth-
esis H1.A and the competing H1.B are the following:
H1.A (H1.B). The relationship between profitability and leverage is positive (negative) for
each subgroup of listed SMEs and country subsample.
Agency costs emerge either between managers and shareholders (agency costs of
equity), or between shareholders and debt-holders (agency costs of debt). In both
cases the main reason for the conflicting interests derives from managers’ personal
objectives that can deviate from shareholders and debt-holders’. Conversely, agency
costs in SMEs must be considered with prudence because in most cases shareholders
and managers coincide. In our sample of listed companies, agency costs of equity
may occur. In any case, listed or nonlisted SMEs’ agency costs of debt can be present.
Consequently, the asset structure of a SME is of great importance to cover the
financing gap. Van Der Wijst and Thurik (1993) suggest that fixed assets offer more
security than current assets due to their permanent nature and the fact that tangible
assets are preferred as collateral compared to intangible assets. Sogorb-Mira (2005)
and Frank and Goyal (2009) suggest that tangibility is positively related to leverage.
Alternatively, since collateral is more relevant in traditional bank lending and we test
firms that have access to capital markets, we expect this variable not only to be
important but also negative in determining the leverage ratio of SMEs. Daskalakis
and Psillaki (2008) find a negative relationship between the size of tangible assets and
nonlisted SMEs’ leverage. There is also the element of the duration of debt; Hall,
Hutchinson, and Michaelas (2004) and Sogorb-Mira (2005) find a negative relation-
ship between nonlisted SMEs’ short-term debt and the relative size of tangible assets
and a positive relationship between long-term debt and the relative size of tangible
assets. This finding is in line with the predictions of the pecking order theory. Based
on the above discussion, there is no clear indication of the effect of tangible assets on
debt. Thus, hypothesis H2.A and the competing H2.B are formed as follows:
H2.A (H2.B). Tangible assets are positively (negatively) related to leverage for each
subgroup of listed SMEs and country subsample.
According to the trade-off theory, the optimal capital structure is a balancing pro-
cedure between the benefits of tax shield and the financial distress problems. SMEs
also favor the existence of a pecking order finance pattern since: (a) under
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 571

asymmetric information regimes, SMEs’ small size imposes high information costs
leading to higher external financing costs; thus small firms use internal financing as
their primary source of funds; and (b) SMEs are often family enterprises managed by
owners that prefer to retain control of their business, resulting in lower risk of losing
control when issuing debt compared to equity. Furthermore, information costs are
lower for larger firms because of better quality of financial information (accuracy and
transparency).
Psillaki and Daskalakis (2009) find a positive relationship between size and lever-
age for Greek, French, Italian and Portuguese SMEs. Panno (2003), Ojah and
Manrique (2005), and J~ oeveer (2013) also find a positive relationship between size
and financial leverage for SMEs in selected European countries. Conversely, Rajan
and Zingales (1995) imply that size of publicly traded firms in the major industrial-
ized countries of G7 affects the capital structure and could be an inverse proxy for
the probability of default and if so, it should not be positively related with leverage.
Thus, our third hypothesis is:
H3.A (H3.B). Size is positively (negatively) related to leverage for each subgroup of listed
SMEs and country subsample.
Myers (1977) argues that volatility of earnings increases financial borrowing costs
and makes borrowing harder. So, lower leverage ratio for firms with larger variance
in earnings is expected. However, Titman and Wessels (1988) find no effect of volatil-
ity on debt ratios, while Pathak (2010) provide evidence on a negative relationship
for listed Indian firms, supporting the trade-off theory. Based on the above discus-
sion, hypothesis H4.A and the competing hypothesis H4.B would be formulated
as follows:
H4.A (H4.B). Risk is positively (negatively) related to debt for each subgroup of listed
SMEs and country subsample.
High-growth firms are most likely to exhaust internal funds and require additional
capital (Michaelas, Chittenden, and Poutziouris 1999). Raising equity may be difficult
and time-consuming especially for smaller firms, highlighting debt as an alternative.
Furthermore, Ramalho and da Silva (2007) found a positive relationship between
growth and debt for large and small nonlisted Portuguese firms; thus, growth may
lead to more debt in the firm’s capital structure.
On the contrary, firms with high growth potential are considered riskier, with
more volatile earnings and difficulties in raising debt with favorable terms. Nunkoo
and Boateng (2010) report a negative relation between growth and leverage. Based on
the above discussion, hypothesis H5.A and the competing hypothesis H5.B would be
formulated as follows:
H5.A (H5.B). Growth is positively (negatively) related to leverage for each subgroup of
listed SMEs and country subsample.
The ESDC had an important negative effect on economic growth, while firms in
stressed countries became more likely to be denied credit and to face higher loan
rates. In such conditions, SMEs began relying considerably more on retained earnings
and government subsidies and as a result, the European sovereign debt crisis had a
572 D. KENOURGIOS ET AL.

Table 1. Variables-definition and sources.

Notation Measure Source
A. Dependent variables
LET Total firm liabilities to total assets (Broad definition) Factset
LED Total firm debt to total assets (Narrow definition) Factset
B. Independent variables of our main interest
AS Asset structure (Tangible assets to total assets) Factset
SALES Natural logarithm of annual turnover Factset
PROFIT Earnings before interest and taxes to total assets Factset
RISK Standard deviation of earnings before interest, taxes Factset
GROWTH Annual percentage change of total assets Factset
C. Macroeconomic and institutional explanatory variables
GDP Gross Domestic Product (GDP) changes Eurostat
Rate MFI interest rates on loans to euro area ECB
Tax Corporate tax rates World Bank
Vol Average volatility of STOXX Europe Small 200 Stoxx Limited
Mkt. Cap. Stock market capitalization as % of GDP World Bank
Crisis European sovereign crisis dummy (2010–2015) Own calculation

negative impact on firms’ leverage. However, the empirical evidence on the impact of
€ urk and Mrkaic (2014) state
the ESDC on SMEs’ capital structure is limited so far. Ozt€
that an increase in bank funding costs in stressed economies is negatively associated
with firms’ access to finance. Conversely, the extra-accommodative monetary policy
of European Central Bank has targeted to ease this point in the economy. Thus, our
sixth hypothesis is the following:
H6.A (H6.B). The European sovereign debt crisis affects negatively (positively) the leverage
of each subgroup of listed SMEs and country subsample.

3. Data and variables

Yearly financial data of European listed SMEs from the EU-28 are used over the
period 2005–2015. Following the standard practice, we exclude financial firms, insur-
ance companies, regulated utilities, real estate, and investment trusts due to their spe-
cific nature of financial statements. Data was collected from the Factset database.
Moreover, companies that do not have at least 3 years of observations were excluded
from the sample to evade missing data problem.
Table 1 describes all dependent and explanatory variables employed in the empir-
ical analysis. The capital structure of the firms is expressed by the ratio of total liabil-
ities to total assets (LET) and total debt to total assets (LED). The independent
variables are profitability, asset structure, size, risk and growth, while a crisis dummy
and several macroeconomic and institutional indicators (change of GDP, interest rates
on loans to euro area nonfinancial corporations, corporate tax rates, average volatility
of the STOXX Europe Small 200 Index and stock market capitalization as % of GDP)
are also included into the analysis. We set the start of the European sovereign debt
crisis at 2010, the year that Greece was bailed out by the European countries and the
International Monetary Fund.2
The next step is to divide our sample into three subgroups: micro, small, and
medium listed enterprises on the basis of annual turnover. Thus, our data consists of
1120 SMEs, containing 133 micro-sized firms (turnover and total assets less than
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 573

Table 2. Descriptive statistics.

Variable Micro Small Medium Total
Distribution by size 133 736 251 1120
% 11.88% 65.71% 22.41% 100%
A. Dependent variables
LET Avg. 0.46 0.44 0.44 0.44
Std. dv. 0.52 0.72 0.46 0.65
Min. 0.00 –0.14 0.00 –0.14
Max. 7.52 36.36 6.35 36.36
LED Avg. 0.16 0.15 0.16 0.16
Std. dv. 0.35 0.39 0.33 0.38
Min. 0.00 0.00 –0.05 –0.05
Max. 7.07 15.10 5.65 15.10
B. Independent variables
PROFIT Avg. –0.06 –0.05 –0.06 –0.06
Std. dv. 0.36 0.49 0.37 0.45
Min. –4.39 –17.07 –9.31 –17.07
Max. 1.46 22.44 5.33 22.44
AS Avg. 0.16 0.17 0.15 0.16
Std. dv. 0.21 0.22 0.20 0.22
Min. 0.00 0.00 0.00 0.00
Max. 0.95 1.00 0.99 1.00
SALES Avg. 0.77 0.73 0.76 0.74
Std. dv. 0.63 0.60 0.58 0.60
Min. –1.52 –2.00 –2.00 –2.00
Max. 2.03 2.53 2.11 2.53
RISK Avg. 0.67 0.63 0.78 0.67
Std. dv. 1.54 1.55 7.02 3.59
Min. 0.00 0.00 0.00 0.00
Max. 29.92 60.95 258.92 258.92
GROWTH Avg. 0.52 0.40 0.21 0.37
Std. dv. 8.78 11.91 1.66 10.15
Min. 0.00 –0.96 –0.87 –0.96
Max. 260.83 1019.00 64.40 1019.00
The table shows the basic descriptive values (mean, standard deviation, minimum and maximum) of all our depend-
ent and independent variables. Our final sample includes 12,320 observations after removing all errors and
inconsistencies.

e2mn and staff headcount less than 10 employees), 736 small-sized firms (turnover
and total assets more than e2mn but less than e10mn and staff headcount less than
50 employees), and finally 251 medium-sized firms (turnover more than e10mn but
less than e50mn, total assets more than e10mn but less than e43mn and staff head-
count less than 250 employees).
Table 2 reports the descriptive values of the sample by firm category. Although,
the three subgroups differ significantly in terms of size, their leverage ratios are quite
close. Micro companies expose the highest leverage ratio, when leverage is measured
via the broad definition. The same holds for small companies, when leverage is meas-
ured with the narrow definition of leverage. Average values of profitability for the
period 2005–2015 are negative and quite similar. Not surprisingly, micro companies
compared to small and medium companies are growing at a faster pace for the sam-
ple period we analyze, as far as the size and growth average values are concerned. As
expected, smaller companies also outpace medium firms in terms of growth. Finally,
an unexpected observation is that microfirms have the lowest average value for the
risk variable, although, quite close to that of smaller companies, while medium firms,
the largest part of our set, display the highest value.
574 D. KENOURGIOS ET AL.

4. Methodology and empirical results

We use a typical balanced panel model, which contains large numbers of cross-
sectional units in a period of eleven years. The use of panel data features a dynamic
notion in the capital structure issue. At the same time, as Arellano and Bond (1991)
state, panel data reduces collinearity among the explanatory variables which leads to
enhanced efficiency of econometric estimates. We employ a number of capital struc-
ture control variables consistent with a number of previous empirical studies. In this
setup, the following equation is used:

CSi;t ¼c þ b1 ASi;t þ b2 SALESi;t þ b3 PROFITi;t þb4 GROWTHi;t þZi;t þ vi þ ui;t (1)

where CSi,t is the vector of firm-specific measure of the capital structure proxied by
two different variables: (1) total liabilities to total assets (LET) and (2) total debt to
total assets (LED). ASi,t stands for the tangible assets to total assets ratio of firm i at
time t, SALESi,t is the natural logarithm of total annual turnover of firm i at time t,
PROFITi,t stands for the earnings before interest and taxes to total assets of firm i at
time t, RISKi,t accounts for the standard deviation of the annual earnings before
interest and taxes of firm i at time t and GROWTHi,t is the annual percentage change
of total assets of the firm i between time t and t – 1. Z is a vector of macroeconomic
and institutional indicators; vi is the unobserved firm-individual effect, whilst ui,t,
denotes the idiosyncratic error term.
We apply the most common panel data estimation methods and choose between
fixed effects and random effects. Since our results may suffer from endogeneity bias
and, since we also want to capture any dynamic effects, we further estimate all regres-
sion models with the generalized method of moments (GMM) estimator proposed by
Arellano and Bond (1991). Finally, to obtain a deeper insight of our results, we split
the sample of 28 European countries to the following 4 subsamples with more homo-
geneous characteristics: core countries, peripheral countries, high technology coun-
tries, and new EU member countries.3

5. Empirical results
5.1. Fixed-effects panel results
Starting with the set of variables, we apply the Hausman test to choose among ran-
dom effects and fixed effects. This tests the null hypothesis of nonexistence of correl-
ation between nonobservable individual effects and the explanatory variables. By
rejecting the null hypothesis (X2 statistic value equal to 145.5 and significant at 99%),
we conclude that the fixed effect estimator is an appropriate method in the context of
our study. We start from the general model (Reg1) and we re-estimate the equation
to arrive into significant explanatory variables (Reg2).
Tables 3 and 4 report the results for the whole sample of SMEs and the three firm
categories (micro, medium, small), respectively. Profitability, asset structure and sales
are statistically significant for both the entire sample and the subsamples, while R-
squared is also considerably high. Additionally, risk is insignificant for the three sub-
categories of SMEs, while growth is significant for the medium category only.
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 575

Table 3. Panel regression results—fixed Effects.

Dependent variable: LET
Variable Reg1 Reg2
PROFIT –0.395 –0.396
(–46.31) (–46.36)
AS 0.442 0.441
(47.31) (47.46)
SALES 0.241 0.241
(72.74) (72.83)
RISK –0.002 –0.002
(–1.81) (–1.93)
GROWTH –0.001
(–1.18)
GDP –0.002
(–0.08)
RATE –0.012
(–0.31)
TAX –0.216 –0.215
(–5.46) (–5.12)
VOL –0.016
(–0.63)
CAP –0.004
– (0.97)
CRISIS 0.012 0.011
(4.08) (6.14)
Constant 0.226 0.219
(17.085) (19.92)
Diagnostics
F test 64.77 65.50
Adj. R2 0.854 0.855
SE of regression 0.446 0.446
Obs. 12,320 12,320
The dependent variable LET is defined as total liabilities to total assets. t values are in parentheses. , , denote
statistical significance at 90%, 95% and 99% respectively. These notes also apply to Tables 4–7.

Specifically, we find first a negative and statistically significant relationship between

profitability and the dependent variable LET (total liabilities to total assets) for all
subcategories of SMEs, in line with Sogorb-Mira (2005), Daskalakis and Psillaki
(2008), and Van Caneghem and Van Campenhout (2012). The same holds for LED
(total debt to total assets).4 These findings confirm the hypothesis H1.B. that the rela-
tionship between profitability and leverage is negative. Firms that generate relatively
high internal funds tend to avoid debt financing as pecking order theory assumes.
This evidence is consistent with the existing literature that more profitable firms that
generate higher earnings should use less debt than less profitable firms. It is import-
ant that all listed SMEs, no matter if they are really small or big, they tend to rely
heavily on cash flow generation as large listed companies do.
Second, asset structure, as it is described by the ratio of tangible assets to total
assets, is found positive and significant at the 1% level for all subsamples. So, the
hypothesis H2.A. that tangible assets are positively related to leverage is confirmed.
According to these findings, firms that rely less on tangible assets tend to use less
debt than firms with relatively more tangible assets, in line with Sogorb-Mira (2005)
and Frank and Goyal (2009) who suggest that tangibility is positively related to lever-
age. This result leads to the conclusion that all European listed SMEs issue debt to
finance longer-term assets. This finding is in line with the suggestions of the pecking
576 D. KENOURGIOS ET AL.

Table 4. Panel regression results for firm categories—fixed effects.

Dependent variable: LET
Variable Micro Small Medium
PROFIT –0.442 –0.413 –0.264
(–13.92) (–40.78) (–14.46)
AS 0.417 0.410 0.539
(13.17) (36.94) (21.06)
SALES 0.261 0.238 0.223
(24.13) (59.51) (28.53)
RISK –0.003 0.002 –0.003
(–0.70) (1.63) (–1.59)
GROWTH 0.0005 –0.0002 0.007
(0.76) (–1.50) (1.83)
GDP 0.095 –0.018 0.154
(0.70) (–0.89) (1.64)
RATE –1.661 0.012 –0.241
(–4.86) (0.39) (–0.98)
TAX 0.428 –0.230 –0.302
(3.08) (–5.03) (–2.83)
VOL –0.241 0.006 –0.109
(2.37) (0.19) (–1.63)
CAP –0.112 –0.0009 –0.035
(4.24) (–0.26) (–1.88)
CRISIS 0.030 0.008 0.024
(2.68) (2.31) (3.15)
Constant 0.247 0.226 0.298
(4.91) (15.70) (8.44)
Diagnostics
F test 45.07 74.12 42.81
Adj. R2 0.811 0.870 0.798
SE of regression 0.351 0.491 0.313
Obs. 1,463 8,096 2,761

order theory, according to which, fixed assets offer more security than current assets,
due to their more permanent nature in the balance sheets.
Thirdly, the size of the firm, proxied by the natural logarithm of annual turnover,
is also found statistically significant and positively related to leverage, confirming the
hypothesis H.3.A. These findings are in line with the results of Psillaki and
Daskalakis (2009) and J~ oeveer (2013). Consequently, larger firms are linked with
higher debt ratios, as found by other studies and supported by theoretical considera-
tions. A negative relationship can be explained only in the case of large firms with
easier access to capital markets financing.
Conversely, risk is statistically insignificant for all the groups of firms. These findings
show that risk, which is measured as the annual standard deviation of operating earn-
ings, has no effect on the leverage of the listed SMEs firms, independently of their cat-
egory. The expected negative relationship between risk and leverage implied by the
pecking order perspective, given that earnings’ volatility increases the financial risk of a
company, is not confirmed by our analysis. Thus, the hypothesis H4 is neither con-
firmed nor rejected.
Finally, growth, as measured by the annual percentage change of total assets, is statis-
tically significant and positively related to leverage only for the medium category, but
insignificant for the small and micro subsamples, in line with Michaelas, Chittenden,
and Poutziouris (1999) and Ramalho and da Silva (2007). This is the only determinant
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 577

for which the results for each subgroup do not coincide. This evidence could suggest
that medium firms, due to their bigger size compared to the other two categories of
SMEs, can consider investments of higher initial cost, and are also more likely to exhaust
internal funds and use debt as additional capital. Summarizing, we conclude that that
hypothesis H5.A. is confirmed against the validity of H5.B. solely for the
medium category.
We also test for macroeconomic and institutional indicators, focusing on their pos-
sible effects on firms’ capital structure decisions (Tables 3 and 4). For the entire sam-
ple and for the subcategories of micro, small, and medium set of companies, the
GDP variable is insignificant. Since micro and small firms are relatively young and
quite small in terms of size, the use of external financing directly from the market
remains limited. Hence, we would expect that economy fluctuation on a yearly basis
should have limited or no effect at all on leverage. However, it seems that this is also
the case for the medium companies. These results are in contrast to Frank and Goyal
(2009) and J~ oeveer (2013), who provide evidence on a positive relationship between
GDP change and debt level for large US listed firms and Eastern European small
companies, respectively.
The interest rates variable (MFI interest rates on loans to euro area), a proxy for
the firms’ cost of debt, should be negatively related to leverage regardless the subcat-
egory of SMEs. However, it is statistically significant with a negative sign only for the
micro firms group. Conversely, corporate income tax rate is statistically significant
for all three subsamples, positively related to leverage for the micro companies and
negatively related for small and medium listed SMEs. For the microfirms, it seems
that the tax shield benefit of debt does not have a strong effect on leverage, as the
trade-off theory suggests. Conversely, for small and medium firms, which are bigger
companies in terms of size, higher corporate taxes are negatively related to leverage.
This finding is in line with the results of Giannetti (2003) and Desai, Foley, and
Hines (2004), and is supported by the pecking order theory.
Volatility, as measured by the average volatility of the STOXX Europe Small 200,
is not significant for the entire sample of SMEs. It is significant and negatively related
to leverage, as one would expect, only for the micro category. It seems that the
smaller the listed SME, the more vulnerable it is to external volatility of stock prices.
Interestingly, the stock market capitalization to GDP indicator is statistically sig-
nificant and negatively related to leverage for the micro and medium category, but
insignificant for the small subsample. This is partly in line with Beck et al. (2006),
who empirically analyze the firm financing choices and the level of market develop-
ment in 30 countries for the period 1980–1991. For the whole sample of SMEs, they
find a statistically significant negative correlation between stock market developments,
as measured by the ratio of market capitalization to gross domestic product, and the
ratios of both long-term and short-term firms’ total equity.
The final result signifies the effect of the European sovereign debt crisis on the
leverage of the listed SMEs. The estimates show that the crisis dummy is statistically
significant and positively related to leverage for all subgroups of European
SMEs, confirming the hypothesis H6.B. This implies that the crisis led to
increased leverage.
578 D. KENOURGIOS ET AL.

Table 5. Panel regression results for country groups—fixed effects.

Dependent variable: LET
Variable EU Core Periphery New Members High Tech.
PROFIT –0.445 –0.068 –0.190 –0.256
(–37.15) (–2.88) (–9.08) (–21.24)
AS 0.416 0.561 0.430 0.611
(22.70) (17.02) (31.47) (17.43)
SALES 0.241 0.307 0.191 0.181
(41.14) (25.08) (35.63) (22.77)
RISK 0.001 –0.001 0.008 0.004
(0.33) (–1.28) (2.90) (2.07)
GROWTH 0.001 0.016 –0.001 0.012
(0.62) (1.99) (–1.05) (3.20)
GDP 0.102 0.298 –0.069 0.247
(1.25) (2.09) (–1.50) (2.37)
RATE –1.506 –0.918 0.377 –1.224
(–8.42) (–2.10) (2.32) (–2.55)
TAX 0.220 –0.336 0.641 –0.769
(3.50) (–2.33) (4.38) (–5.15)
VOL –0.014 –0.364 0.012 –0.202
(–0.27) (–3.09) (0.29) (–2.25)
CAP –0.032 –0.185 –0.033 –0.096
(–2.04) (–8.44) (–2.28) (–3.97)
CRISIS –0.001 0.040 0.015 0.036
(–0.22) (2.66) (2.88) (4.88)
Constant 0.247 0.380 –0.030 0.590
(9.82) (6.07) (–0.96) (8.87)
Diagnostics
F test 52.54 59.95 59.22 40.96
Adj. R2 0.827 0.854 0.846 0.793
SE of regression 0.572 0.224 0.188 0.276
Obs. 5,896 1,232 3,267 1,925

5.2. Fixed-effects results for country groups

To provide further evidence on country effects, we re-estimate all specifications by
splitting the countries’ sample to more homogeneous subsamples. The four country
groups are distinguished between the core, the periphery, the high technology and
new EU members. The results of this set of regressions are presented in Table 5.
Focusing on the crisis dummy, the European sovereign crisis dummy is found to
have significant positive effects on leverage for almost all the country groups, except
for the core countries.5
We also find a negative and statistically significant relationship between profitabil-
ity and leverage for all country groups. This finding highlights the fact that firms that
generate relatively high internal funds tend to avoid debt financing as pecking order
theory assumes. Moreover, the asset structure is statistically significant and exhibits a
positive effect for all country groups. This result suggests that the European listed
SMEs of all countries use debt to finance longer-term assets. The above results hold
for the three subgroups of listed SMEs.
Sales is also statistically significant and positively related to the dependent varia-
bles, as we found out in the analysis of the three firm categories, implying that larger
firms are linked with higher debt ratios. Finally, from the macroeconomic variables’
perspective, the variables RATE and taxation are significant for all country groups.
Interest rate is significant and negatively related to LET for all countries except new
members. The outcome in relation to tax is more ambiguous. Core and new
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 579

Table 6. Panel regression results—GMM Arellano–Bond estimator.

Dependent variable: LET
Variable Reg1 Reg2
L. LET 0.248 0.247
(13.94) (13.98)
PROFIT –2.026 –2.026
(–20.15) (–20.09)
AS 3.409 3.403
(5.10) (5.12)
SALES 0.888 0.887
(3.63) (3.64)
RISK –0.134 –0.132
(–2.20) (–2.20)
GROWTH –0.028 –0.028
(–1.98) (–1.97)
GDP 0.757 0.763
(2.59) (2.53)
RATE 0.186
(0.85)
TAX –4.077 –3.975
(–3.32) (–3.24)
VOL –0.777 –0.784
(–3.08) (–3.12)
CAP –0.107 –0.109
(–2.73) (–2.67)
CRISIS 0.054 0.055
(1.90) (1.91)
Diagnostics
J-statistic 41.88 42.03
Prob(J-statistic) 0.646 0.678
Instruments 58 58
Obs. 10,080 10,080

members’ countries reveal a significant positive sign, while the periphery and the new
technology countries share the opposite sign.
The main conclusion of this country group analysis is that the variables taxation
and RATE are the only statistically significant factors for the SMEs of all country sub-
groups, although, the signs of the coefficients are not the same for all the subgroups.
For the small companies, except for taxation all other macroeconomic and institu-
tional factors are insignificant. Conversely, the microfirms’ category is the most
exposed category on external macroeconomic and institutional factors. Additionally,
micro and medium listed European SMEs share more common features, since both
groups exhibit a negative relation to leverage in terms of stock market volatility and
stock market capitalization to GDP.

5.3. Dynamic panel estimations

To check the robustness of our results, and also take into account any dynamic
effects or endogeneity problems, we repeat our estimation procedures by using the
GMM method of Arellano and Bond (1991). The results are quite similar with those
obtained from the fixed effects estimator.6
Table 6 presents the results for the whole sample of listed SMEs. We find a nega-
tive relationship between profitability and leverage, which is statistically significant
for all SMEs. Asset structure and sales are also statistically significant and positively
580 D. KENOURGIOS ET AL.

Table 7. Panel regression results for country group—GMM Arellano–Bond estimator.

Dependent variable: LET
Variable EU Core Periphery New members High Tech.
L. LET 0.411 0.558 0.317 0.017
(15.21) (3.52) (3.56) (0.34)
PROFIT –0.548 0.043 –0.068 –0.228
(–3.33) (1.35) (–0.55) (–4.73)
AS 1.391 4.339 0.321 0.599
(2.22) (11.54) (1.47) (1.68)
SALES 0.199 –0.159 –0.148 0.223
(1.53) (–1.62) (–0.89) (6.48)
RISK –0.092 0.094 –0.001 0.070
(–1.84) (2.56) (–0.27) (2.70)
GROWTH 0.098 0.202 0.051 –0.025
(2.13) (1.72) (1.26) (2.34)
GDP 1.931 1.067 0.387 0.358
(2.12) (0.79) (0.93) (1.44)
RATE –24.742 –0.710 2.420 –5.625
(–3.06) (–0.40) (2.56) (–2.66)
TAX –10.721 1.373 9.115 –1.601
(–3.04) (1.26) (1.77) (–1.88)
VOL 2.459 –1.106 0.060 0.339
(2.55) (–2.52) (0.34) (1.25)
CAP –1.042 –0.524 –0.031 0.102
(–2.40) (–2.77) (–0.39) (1.18)
CRISIS –0.175 0.101 0.019 0.056
(–2.65) (2.33) (2.24) (2.35)
Diagnostics
J-statistic 46.24 44.40 46.10 41.02
Prob(J-statistic) 0.401 0.552 0.507 0.748
Instruments 58 58 58 58
Obs. 4,824 999 2,673 1,575

related to leverage for the full sample of SMEs. Our findings on the tax variable are
identical to fixed effects results, where tax is significant and negatively related to
leverage. Finally, the crisis dummy is also significant and positively related to leverage
for the entire sample.
As a final step, we repeat the estimation procedure for the four country groups.
Table 7 presents the results obtained by GMM. Although, there are some differences
compared to the results from the fixed effects estimator, the central results of this
study are confirmed. The crisis dummy is significant for the core economies and
negatively related to capital structure, while it is significant but positively related for
the periphery, the new members and the high technology countries, confirming
the fixed effects results. Almost similar findings are provided for the rest of the
independent variables across the four subsamples.

6. Conclusions
This study investigated the driving factors of the capital structure of listed SMEs in
the EU-28, trying to identify possible differences between firm size groups (micro,
small, and medium) and also between groups of countries with more homogeneous
characteristics (core, periphery, high technology, and new EU member countries) dur-
ing a period (2005–2015), which includes the European sovereign debt crisis.
 JOURNAL OF SMALL BUSINESS & ENTREPRENEURSHIP 581

We provide robust results using a dynamic panel threshold methodology with sev-
eral model specifications. We find strong evidence that the European sovereign debt
crisis has affected the leverage ratios for all country groups and firm categories. More
specifically, the crisis seems to increase the SME’s leverage for all country subgroups,
except for the core countries, suggesting that the financing gap between the core and
the rest of the EU has increased. This finding also raises questions on the effective-
ness of the ECB’s monetary policy decisions, although, this area needs further investi-
gation by including into the analysis further factors that could capture the
transmission effect of the central bank’s nonconventional monetary policies.
We also provide evidence that the three size categories of SMEs do not reveal dif-
ferent capital structure’s behavior for the period 2005–2015. We conclude that the
firms’ debt ratio is negatively related to profitability and positively related to asset
structure and size, regardless of the size of the companies and the country group.
Moreover, taxation is the most significant variable for all the subgroups, while GDP
growth is significant only for the medium listed SMEs. The above findings enrich a
literature which provides mixed results regarding the effect of each determinant on
the SMEs’ leverage, by highlighting the driving factors which really matter for the
capital structure of the European economy’s backbone.

Notes
1. Focusing solely on listed SMEs offers some profound advantages in our research.
Nonlisted SMEs financial records are hard to find and even harder to be reviewed and
validated. Lack of accuracy provides limitations and bias to the research findings since
their annual accounts are unaudited. Furthermore, nonlisted SMEs often have a limited
track record in providing available financial information to the investors and it is quite
common to have one dominant owner-manager with unlimited decision–making power.
Coonversely, publicly traded SMEs, due to the substantial transparency in equity markets,
are very often viewed to be of higher quality. Listed SMEs could be approached as the
“creme de la creme” of this important category of firms. In order to get publicly listed,
the company needs to meet a variety of strict criteria and also to go through a rigorous
disclosure process, which creates a more homogenous study group.
2. To investigate the robustness of our results, we conduct a sensitivity analysis of
variations in the start date of the crisis with a fixed crisis period length and of variations
in crisis and stable periods’ length with a fixed start date of the crisis. This analysis
shows that period definition does not affect the central results.
3. The core countries are the following: Austria, Belgium, Germany, France, Luxembourg,
Netherlands, and the United Kingdom. The peripheral countries are: Greece, Italy,
Ireland, Portugal, Cyprus, and Spain. The high technology group includes Finland,
Sweden, and Denmark. Finally, the new EU group includes Bulgaria, Croatia, Czech
Republic, Slovenia, Slovakia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland,
and Romania.
4. The results for LED as the dependent variable do not differ significantly, so they are
not presented.
5. By splitting the entire sample again in firm categories, we find that the crisis dummy is
statistically insignificant for all three firm categories (micro, small, and medium), across
the core countries. Analytical results for the whole sample are not reported here for
economy of space, but are available from the authors upon request. In the periphery
countries, the crisis dummy is only statistically significant for the medium companies.
Finally, in new members’ countries and in high technology countries, the crisis dummy is
582 D. KENOURGIOS ET AL.

statistically significant for the small and medium firms but insignificant for the
microcategory.
6. GMM Arellano and Bond estimator results for micro, small, and medium categories are
consistent to the fixed effects results and are available from the authors on request.

Acknowledgments
The authors would like to thanks the Guest Editors and the two anonymous referees of this
journal, for their helpful comments. Any unintended errors or omissions are our own doing.

Disclosure statement
No potential conflict of interest was reported by the authors.

Notes on contributors
Dimitris Kenourgios is Associate Professor of Finance in the Department of Economics at the
National and Kapodistrian University of Athens. His research interests include financial mar-
kets, financial contagion, and applied corporate finance. He has published in a variety of jour-
nals such as Journal of International Financial Markets, Institutions & Money, International
Review of Financial Analysis, Small Business Economics, The Manchester School, Journal of
Multinational Financial Management, Journal of Policy Modelling, Economic Modelling, Finance
Research Letters, Journal of Economic Studies, Applied Financial Economics, Research in
International Business and Finance and Applied Economics Letters.
Georgios A. Savvakis is a Doctoral Student of PhD Program at the National and Kapodistrian
University of Athens. His research interests focus on SMEs, capital structure decisions and
financial analysis. He has more than 12 years of experience as an economist or a research ana-
lyst at independent research firms, brokerage firms, and investment committees. Currently, he
is Senior Market Economist/Research Analyst at an independent research firm.
Theofanis Papageorgiou is research fellow at the National and Kapodistrian University of
Athens and the National Technical University of Athens. He holds a PhD from the National
Technical University of Athens. His research interests focus on financial economics, macroeco-
nomics, and econometrics. He has published in outlets such as The European Journal of the
History of Economic Thought, Open Economies Review, Applied Economics Letters, Economic
Modelling and Journal of Economics and Business.

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