Capital structure and its choice in Central and Eastern Europe

Péter Hernádi () and Mihály Ormos
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Péter Hernádi: Budapest University of Technology and Economics, Department of Finance, Magyar tudósok krt. 2, H-1117 Budapest, Hungary

Acta Oeconomica, 2012, vol. 62, issue 2, 229-263

Abstract: We analyze the determinants of capital structure and its choice by small and medium-sized enterprises in Central and Eastern Europe from 2002 to 2007. We test the relevance of the three main theories: the Static Trade-off Theory, the Pecking Order Theory, and the Agency Theory, which have been derived primarily for developed markets, because our knowledge on their validity for emerging European countries is limited. We confirm the positive impact of size and asset tangibility on the leverage, while rejecting both the positive impact of profitability and tax, as well as the negative impact of business risk and non-debt tax shields. We report that SMEs behave homogeneously, and the relevant capital structure determinants show remarkable steadiness. Our results show a special time varying behaviour, in which the relevant determinants become stronger, while most of the country-specific factors present weakening effects. We argue that firms of the CEE countries remarkably converged their financial decision-making procedure to that of developed countries through the investigated period. The relevance of the Trade-off Theory is weak, as firms respect a one-sided upper threshold rather than converging to a fixed target on both sides, while they are not indifferent to the hierarchy of financing alternatives.

Keywords: capital structure; emerging European countries; Static Trade-off Theory; Pecking Order Theory; Agency Theory (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Date: 2012
Note: We have received helpful suggestions from Matjaz Crnigoj and useful comments from participants at the 2010 INFINITI Conference at the Trinity College, Dublin, Ireland and at the EuroConference 2010, organised by the Society for the Study of Emerging Markets, in Milas, Turkey. We are thankful to the two anonymous reviewers for their valuable comments and suggestions. We acknowledge the financial support of BAROSS-4-2005-0005-OMFB-01067/2006 project.
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