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Strategy and Financial Policy in UK Small Firms
Author(s) -
Jordan Judith,
Lowe Julian,
Taylor Peter
Publication year - 1998
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00176
Subject(s) - capital structure , explanatory power , debt , empirical evidence , corporate finance , pecking order theory , finance , business , capital (architecture) , economics , work (physics) , financial distress , financial system , mechanical engineering , history , philosophy , archaeology , epistemology , engineering
There is growing evidence that capital structure and firm strategy are linked but most studies to date have focused on large, publicly quoted firms, with little attention given to small and medium‐sized enterprises (SMEs). A major proposition of the study is that both strategic and financial factors are necessary to explain chosen debt levels. The empirical question adopted for this work, given the best financial model of capital structure, is – does strategy provide any additional explanatory power? Hence strategy and financial variables are seen as complementary rather than competing determinants of capital structure. There appears to be strong evidence supporting the proposition that competitive strategy affects the capital structure of SMEs, but there is little evidence of any impact from corporate strategic factors. The study also supports the notion that there is a ‘pecking order’ in SME financing and that variability in profits results in ‘distress’ borrowing. This study provides important empirical evidence to support work on the capital structure puzzle and the funding problems of SMEs.