SME rebalancing short-term and long-term debt ratios: the role of financial distress costs

Zélia Serrasqueiro, Filipe Sardo, Elisabete Neves and Flávio Morais

International Journal of Accounting & Information Management, 2024, vol. 33, issue 1, 169-186

Abstract: Purpose - This study seeks to analyze the effect of the financial distress costs on small and medium-sized enterprises (SME) rebalancing of short-term and long-term debt ratios. Design/methodology/approach - The authors use the system-generalized method of moments (GMM-sys) to treat data collected for a sample of Portuguese manufacturing SMEs for the period 2011–2017. Findings - Financial distress costs positively impact the speed with which SMEs rebalance their short-term and long-term debt ratios The positive effect of financial distress costs on the speed of adjustment (SOA) is higher for the short-term than for the long-term debt ratio. This result suggests that SMEs seek to overcome quicker the financing imbalance in the short run, probably, due to their dependence on short-term debt. Practical implications - SME owners-managers should seek to rely less on short-term debt to reduce the firm default risk, the financing imbalance and the financial distress costs. Banks should lend long-term loans to SMEs, given that the high financial distress risk of these firms results from their dependence on short-term debt financing. Policymakers should promote SME access to external finance sources with lower transaction costs, to SME rebalance their capital structures. Originality/value - This study analyzes the effect of financial distress costs on the SOA with which SMEs rebalance their capital structure. We estimate the financial distress costs based on a hazard model, to analyze their effect on the SOA toward the target debt ratios.

Keywords: Financial distress costs; Manufacturing SMEs; Refinancing risk; Target short-term and long-term debt ratios (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:ijaim-02-2023-0034

DOI: 10.1108/IJAIM-02-2023-0034

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