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Title: Financial policy and capital structure choice in UK privately held companies
Author: Michaelas , Nicos
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 1998
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This research project utilises both quantitative and qualitative research methods and provides empirical evidence on the financial as well as non-financial and behavioural issues governing the financial policies and capital structure choices of privately held companies (independent small and medium sized enterprises (SMEs) with less then two hundred employees). Different capital structure theories are reviewed in order to formulate testable propositions concerning the levels of debt in small private companies and different research methods are employed to test these hypotheses (these include a number of regression models utilising a panel database of 3,500 SMEs over a period of ten years (1986-1995),30 face-to-face interviews and two postal surveys with responses from more than 300 companies). The results do not provide support for the theorised effect of tax benefits and bankruptcy costs on the capital structure of small privately held companies. Rather, of greater importance are agency and asymmetric information costs that make debt finance less attractive in the small business sector. Size, age, profitability, growth and future growth opportunities, operating risk, asset structure, stock level and net debtors all seem to have an effect on the level of both the short and long term debt in small firms. Furthermore, the research project provides evidence which suggests that the capital structure of small private companies is time and industry dependent. The results also indicate that the last recession had an effect on the borrowing behaviour of small businesses, which appear to be more prudent in their financing strategies as they now rely less and less on debt finance and more on retained profits. At the same time, financial institutions appear to be more cautious in their lending policies as collateral for the security of loans has became of increasing importance. It is also shown that owner/directors' preferences, perceptions, beliefs and attitudes towards external finance (both debt and equity) have a major impact on financial policies and capital structure choices of these firms. Evidently, the debt-equity position of private companies at any time will be largely affected by different characteristics of the owner/director such as: risk taking propensity, business and personal goals, need for control, knowledge, personal net worth, age and past experience. Small business owner/directors seem to follow a pecking order in financing their firm's needs, using retained profits as much as possible and issue debt only when it is necessary. In these businesses, where there is a strong need for managerial and ownership control, external equity is only considered as a last resort. During the stages of business development, there will be phases when a firm can rely on internal financing and times when external debt or equity will be required. The results presented in this thesis suggest that different firm and marketplace characteristics will determine the need as well as the ability of the firm to raise external finance. However, once financial needs are identified, the final choice between debt and equity, or whether any external finance at all will be raised, will largely depend on the preferences and expectations of the owner/director. In short, the capital structure of a small privately held company at any time, will be a function of the characteristics of the firm, its owner/managers, and of the marketplace. The thesis discusses a number of policy implications that emanate from the findings, and considers a number of possible actions that the government and financial institutions could undertake in order to enhance the financial development and prosperity of SMEs.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available