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Financing decision, cost of debt and profitability: evidence from non-financial SMEs in the UK

Yapa Abeywardhana, Dilrukshi Krishanthi (2012)
Ph.D. thesis, University of Birmingham.

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Abstract

The aim of this thesis is to contribute to the existing empirical financial literature on the determinants of capital structure and adjustment process, cost of debt determinants and the affect of capital structure on profitability in the context of non-financial Small and Medium size Enterprises (SME) in the UK. In order to formulate the testable hypothesis different capital structure theories are reviewed.

A firm can choose equity, debt or both to finance its operations. The selection of optimal debt equity mix is a crucial issue in finance. The Generalized Method of Moment (GMM) is considered to control for simultaneous equation bias employing both firm specific and macroeconomic variables. For entire population of non-financial SMEs in the UK using Two Stage Least Square (TSLS) methodology, we focused on determinants of the cost of debt capital and the impact of capital structure on profitability.

Results indicate that findings are consistent with the pecking order theory, trade-off theory and agency theory. Our results show that short term debt plays an important role in capital structure, cost of debt and profitability of SMEs in the UK. Moreover, the short term debt is appeared to be more expensive for the manufacturing sector and more profitable for service sector whilst size and macroeconomic variables have a significant impact on leverage.

Type of Work:Ph.D. thesis.
Supervisor(s):Dickinson, David G. and Strobel, Frank
School/Faculty:Colleges (2008 onwards) > College of Social Sciences
Department:The Business School
Subjects:HB Economic Theory
HG Finance
Institution:University of Birmingham
ID Code:3552
This unpublished thesis/dissertation is copyright of the author and/or third parties. The intellectual property rights of the author or third parties in respect of this work are as defined by The Copyright Designs and Patents Act 1988 or as modified by any successor legislation. Any use made of information contained in this thesis/dissertation must be in accordance with that legislation and must be properly acknowledged. Further distribution or reproduction in any format is prohibited without the permission of the copyright holder.
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