Determinants of Capital Structure Choice for SMEs

In this study the researcher analyzed the determinants of capital structure choices for Small and medium enterprises (SMEs) through survey methods and hypotheses are formulated from the pecking order and agency theory. The determinants of capital structure identified based on previous studies, namely, age, size, ownership, R&D and collateral are regressed against the source of finance, namely, personal saving and funds from families and friends, retained profit, total debt, short term debt, long term debt and external equity. The Multivariate regression results suggest that age, ownership, and the provision of collateral are most important determinants of the capital structure of SMEs in Mekelle city. Furthermore the sector classifications are regressed in the independent variable as dummy variables to examine the stability and variability of the regression coefficients across sectors. In order to shed further light other than the multivariate analysis, the study also employed five point likert-scales to investigate the attitudes and perception of the owner-managers of SMEs towards the source of finance.