Reintroducing Industry Effects in Capital Structure Determination of SMEs

Abstract Following recent literature on the specific field of industry effects on capital structure determination (Kumar et al., 2017; Daskalakis et al., 2022), the main purpose of this paper is to reintroduce the importance of industry effects in the determination of financial leverage, focusing on SMEs. In this paper, we investigate whether SMEs capital structure is determined differently across different industries. We construct a three-stage econometric model, built around industry differentiations in capital structure determination, aiming to investigate the following two aspects: a) the relationship between the debt ratio and specific capital structure determinants, taking the industry factor under consideration, b) any potential differentiation in capital structure determinants across the selected industries. We not only show that the different capital structure determinants affect financial leverage in different ways across industries (different signs), but we also show that the level of intensity is different (statistically different coefficients) even in case the signs are the same. JEL classification numbers: G3, G32. Keywords: Capital Structure, Financial Leverage, Industry Effects, SMEs Financing, Pecking Order Theory, Trade-off Theory.