Local Financial Development and SMEs Capital Structure: An Empirical Investigation

Abstract

The present study investigates the role of institutional differences at the local level as determinants of firms’ capital structure. Specifically, the aim is to empirically assess whether and to what extent SMEs’ financial decisions are affected by local financial development - evaluating this influence both ceteris paribus, and by allowing it to be conditional on different levels of legal enforcement inefficiency. After controlling for debt inertia, firms’ heterogeneity and endogeneity problems, the main finding of the analysis suggests that local financial development may be an important determinant of SMEs’ capital structure. In fact, firms appear to have better access to financial debt in areas characterized by a higher quality of the legal system - possibly as intermediaries may be more inclined to provide funds where the enforcement systems enable a more effective credit protection. Despite the international process of capital markets integration, local financial institutions do not seem to become irrelevant for SMEs - which are in need of well developed institutions at local level to gain easier access to external financial resources.

Keywords: firms’ capital structure, bank debt, local financial development, local enforcement system, SMEs

JEL Classification: G21, G30