Debt financing and firm performance: an empirical study based on Swedish data

Purpose - The purpose of this study is to examine the relationship between debt level and performance among small and medium-sized enterprises (SMEs). Design/methodology/approach - Unlike the vast majority of previous research, this study uses three-stage least squares (3SLS) and fixed-effects model...

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Bibliographic Details
Published in:The journal of risk finance 2015-01, Vol.16 (1), p.102-118
Main Authors: Yazdanfar, Darush, Öhman, Peter
Format: Article
Language:English
Subjects:
Asymmetry
Banks
Capital markets
Capital structure
Cash flow
Conflicts of interest
Costs
Debt financing
Debt policy
Economic models
Economics
Equity capital
Finance
Financial institutions
Financial leverage
Financing
Firm performance
Investments
Least squares method
Long term debt
Moral hazard
Policies
Profitability
Short term debt
Small & medium sized enterprises-SME
Small business
SMEs
Stockholders
Studies
Survival
Sweden
Variables
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Summary:Purpose - The purpose of this study is to examine the relationship between debt level and performance among small and medium-sized enterprises (SMEs). Design/methodology/approach - Unlike the vast majority of previous research, this study uses three-stage least squares (3SLS) and fixed-effects models to analyse a comprehensive, cross-sectoral sample of 15,897 Swedish SMEs operating in five industry sectors during the 2009-2012 period. Findings - This study confirms that debt ratios, in terms of trade credit, short-term debt and long-term debt, negatively affect firm performance in terms of profitability. As a high debt ratio seems to increase the agency costs and the risk of losing control of the firm, SME owners and managers tend to finance their businesses with equity capital to a fairly high degree. Practical implications - As debt policy significantly influences firm performance, and thereby firm value and survival, SME owners and managers should focus on finding a satisfactory debt level. Originality/value - To the authors' best knowledge, this study is among the first to use 3SLS and fixed-effects models to analyse the relationship between debt level and firm performance. Moreover, while most previous research has examined listed firms, this study highlights the issue among SMEs, which play a fundamental role in the economy.
ISSN:1526-5943
2331-2947
DOI:10.1108/JRF-06-2014-0085