Do country or firm factors explain capital structure? Evidence from SMEs in France and Greece

We investigate the capital structure determinants of small and medium sized enterprises (SMEs) using a sample of Greek and French firms. We address the following questions: Are the capital structure determinants of SMEs in the two countries driven by similar factors? Are potential differences driven by country-specific or firm-specific factors? Are the size and structure of their financial markets important factors to explain any cross-country differences on SME capital structure? To answer these questions we apply panel data methods to the sample of firms for the period 1998 to 2002. We assess the extent to which the debt to assets ratio of firms depends upon their asset structure, size, profitability and growth rate. The results show that the SMEs in both countries exhibit similarities in their capital structure choices. Asset structure and profitability have a negative relationship with leverage, whereas firm size is positively related to their debt to assets ratio. Growth is statistically significant only for France and is positively related to debt. We attribute these similarities to their institutional characteristics and in particular the commonality of their civil law systems. We find differences in the intensity of the capital structure relationship between the two countries. We provide evidence that these differences are due to firm-specific rather than country factors.