Does financing behavior of SME entrepreneurs of Bangladesh follow capital structure theory? An investigation into Pecking Order Theory

Md. Rostam Ali (), Rustom Ali Ahmed (), Rushafa Tasnim Tisha () and Md. Ashikul Islam
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Md. Rostam Ali: Department of Accounting, Mawlana Bhashani Science and Technology University, Santosh, Tangail 1902, Bangladesh
Rustom Ali Ahmed: #x2020;Department of Finance, University of Rajshahi, Rajshahi 6205, Bangladesh
Rushafa Tasnim Tisha: #x2021;Master of Business Studies, Finance, Massey University, Auckland, New Zealand
Md. Ashikul Islam: #x2020;Department of Finance, University of Rajshahi, Rajshahi 6205, Bangladesh

International Journal of Financial Engineering (IJFE), 2021, vol. 08, issue 01, 1-16

Abstract: This study attempts to investigate whether the financing preferences of small and medium enterprises (SMEs)’ entrepreneurs of Bangladesh follow capital structure theory by investigating into Pecking Order Theory (POT). For this study, cross-sectional primary data have been collected through questionnaire. The answers of the questions have been measured through five points Likert Scale. The scores were analyzed using mean score. To analyze the data, some descriptive statistics have been used. Besides, one sample one tail t-test has been applied to test the hypotheses. The study finds that the entrepreneurs themselves do not believe that there is an information asymmetry in debt market. But their perception regarding debt market ascertained the presence of the information asymmetry between SME sector (entrepreneurs of SME) and the debt market (banks). The answers of respondents are statistically significant that they want to use the retained profits first, bank loan as second and want to issue external equity (taking partner/s) as a third option among these three alternatives of additional financing. This tendency of the respondents towards financing is consistent with POT. Therefore, Government policy for motivating SMEs to keep formal accounting should be introduced to reduce the information asymmetry in debt market along with taking proper initiatives to increase accessibility of SMEs to institutional credit.

Keywords: Small and medium enterprises (SMEs); financing behavior; capital structure; pecking order theory (POT) (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S2424786320500371

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