TRADE-OFF THEORY VERSUS PECKING ORDER THEORY: CAPITAL STRUCTURE DECISIONS IN A PERIPHERAL REGION OF PORTUGAL
Open accessAbstract
This paper seeks to analyse whether the capital structure decisions of Small and Medium-Sized Enterprises (SMEs) are closer to the assumptions of Trade-Off Theory or to those of Pecking Order Theory. We use a sample of SMEs located in the interior region of Portugal, using the LSDVC dynamic estimator as method of estimation, the empirical evidence obtained allows us to conclude that the most profitable and oldest SMEs resort less to debt, which corroborates the forecasts of Pecking Order Theory. SMEs, with greater size, resort more to debt, corroborating the forecasts of Trade-Off Theory and Pecking Order Theory. In addition, SMEs adjust noticeably their current level of debt towards the optimal debt ratio, which corroborates what is forecast by Trade-Off Theory. Therefore, this paper enhances that Trade-Off and Pecking Order Theories are not mutually exclusive in explaining the capital structure decisions of SMEs. The results suggest that younger and smaller SMEs should be object of public financing support, when the internal financing is clearly insufficient to fund those firms’ activities.
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Firms should first operate efficiently to achieve the optimal level of liquidity through WCM.
“therefore, firms should first operate efficiently to achieve the optimal level of liquidity through WCM (Jahanzeb et al., 2013;Serrasqueiro & Caetano, 2015).”
From Does the Efficiency of a Firm's Intellectual Capital and Working Capital Management Affect Its Performance? (2024) · cites this paper as Serrasqueiro & Caetano, 2015
The Introduction and section 3.2 discuss capital structure and SMEs’ adjustment toward an optimal debt ratio, not an optimal level of liquidity. Searches for working capital management, liquidity, and operating efficiency found no passage in our copy supporting the attributed recommendation. (LLM, conf=0.78)
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References 72 · Cited by 218
Research works printed but not linked: 2
- Ang, J. 1991. Small business uniqueness & the theory of financial management, Journal of Small Business Finance 1: 1-13.
- Sauve, M. Scheuer, H. Friderichs (Eds.). Corporate finance in Germany and France. Frankfurt am Main: Deutsche Bundesbank, 140-191.
- Authors
- Serrasqueiro, Z., & Caetano, A.
- Affiliations
- University of Beira Interior (PT)
- ORCID
- Serrasqueiro, Zélia
- Venue
- Journal of Business Economics and Management
- Published
- 2014-12-16
- Volume
- 16
- Issue
- 2
- Pages
- 445-466
- ISSN
- 1611-1699 (ISSN-L)
- 2029-4433
- OpenAlex
- W2078146534
- Cited by
- 218
- References
- 72
- Citations by year
- 2026: 7 · 2025: 25 · 2024: 17 · 2023: 30 · 2022: 20 · 2021: 29 · 2020: 34 · 2019: 20 · 2018: 23 · 2017: 5 · 2016: 5 · 2015: 3
- FWCI
- 18.42
- Type
- journal article
- Language
- en
- Open access
- gold
- doi.org
- Licence
- cc-by
- Locations
- Journal of Business Economics and Management (publishedVersion, cc-by)
- RePEc: Research Papers in Economics (submittedVersion)
- DOAJ (DOAJ: Directory of Open Access Journals) (submittedVersion)
- Funders
- Fundação para a Ciência e a Tecnologia (PTDC/EGE-GES/116004/2009)
- Topics
- Social Sciences › Business, Management and Accounting › Accounting › Corporate Finance and Governance
- Social Sciences › Business, Management and Accounting › Accounting › Financial Analysis and Corporate Governance
- Social Sciences › Business, Management and Accounting › Accounting › Working Capital and Financial Performance
- Keywords
- capital structure, trade-off theory, pecking order theory, small and medium-sized enterprises, debt financing, firm age, firm size, optimal debt ratio
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