This chapter aims to understand which determinants are more relevant to explain each source of financing for the Portuguese civil construction sector SMEs (small and medium enterprises). For this purpose, an unbalanced panel data sample of 407 firms from 2010 to 2018 is analyzed. Five capital structure proxies are used: total debt, short-term debt, medium and long-term debt, financial debt, and trade credit. Through the stepwise method, the most accurate determinants were selected and were then used in the estimation of five models using the panel data. Results show that the relevance of the determinants is different depending on the capital structure proxy. Profitability and age are the most relevant variables since impact all proxies of capital structure analyzed. Moreover, companies' size, liquidity and assets turnover, and inflation and interest rates are also relevant to explain companies' capital structure. The generality of the findings confirms the pecking order theory, but the trade-off theory also explains some results.
TopIntroduction
The capital structure and its influence on the company's cost of capital and on the company’s value have been studied by several researchers for decades. The first works date back to the 50s when the traditional theory was proposed by Durand (1952). However, the topic gained relevance with the Modigliani and Miller theorem, in 1958 which states that capital structure had no impact on the company's value. Thereafter, several theories were created, namely the trade-off theory (Kraus & Litzenberger, 1973; Angelo & Masulis, 1980), the pecking order theory (Myers & Majluf, 1984), the agency theory (Jensen & Mecking, 1976), and the market timing theory (Baker & Wurgler, 2002). Despite the existence of numerous studies in the area, there is no consensus regarding the existence of an optimal capital structure, which allows the minimization of the cost of capital and the maximization of the company's value.
To understand the capital structure, it is relevant to know which factors explain it. The most common determinants used in the literature to explain companies indebtedness are related to its characteristics, namely the company's size, profitability, asset structure, non-debt tax benefits, growth opportunities, liquidity, age, and risk (e.g., Ramalho & Silva, 2009; Proença, Laureano & Laureano, 2014; Pietro, Sànchez & Roldan, 2017; Lisboa, 2019), and macroeconomic factors, such as inflation, Gross Domestic Product (GDP) growth and interest rates (e.g., Handoo & Sharma, 2014; Lisboa, 2017; Daskalakis, Balis & Dalla, 2017; Lisboa, 2019). When analyzing the specific case of the construction sector, researchers usually also include the ratio of asset turnover (e.g., Choi, Yoo, Kim & Kim, 2014).
Most of the empirical studies on financing decisions have focused on large and listed companies (Ramalho & Silva, 2009; Handoo & Sharma, 2014; Vergas, Cerqueira & Brandão, 2015). Studies on small and medium-sized enterprises (SMEs) are less explored (exceptions are for example the works of Serrasqueiro, Matias & Salsa, 2016; Daskalakis et al., 2017; Pietro et al., 2017).
The present chapter aims to study the capital structure of Portuguese SMEs, specifically in the civil construction sector. It is intended to understand which determinants are more relevant to explain each source of a company's finance. For this purpose, an unbalanced panel data sample of 407 companies is analyzed, over a 9-year time horizon, between 2010 and 2018.
SMEs are the majority of companies all over the world, with a greater contribution to create wealth and generate jobs for all economies. In Portugal, there are around 1,314,944 SMEs, contributing around 61.4% to the Portuguese GDP and 77.8% to employment (Pordata, 2022). The level of indebtedness of Portuguese SMEs is around 62.2%. Moreover, financial debt finances around 32.5% of the companies’ total assets, while trade credit finances around 9.6% (Bank of Portugal, 2022). SMEs typically face greater financial constraints and are more likely to go bankrupt (Yazdanfar & Öhman, 2020). Financial constraints increase costs, which in turn may impact various stakeholders (customers, workers, suppliers).