The capital structure determinants of Chinese listed SMEs

Abstract

The main objective of this paper is to study the capital structure determinants and their indebtedness level in Chinese listed SMEs. In addition to total debts, this study also analyzes the different impacts on short-term and long-term debts. The hypotheses base on two main theories, pecking order theory, and trade-off theory. As the results show, the pecking order theory is more suitable for Chinese firms. The results conclude that profitability, operating risk and firm size are determinants of capital structure in Chinese SMEs, while asset tangibility has no significant impact on indebtedness. This study also considers the characteristics of the Chinese economy. Because of the size limitation and private ownership, SMEs have difficulties in obtaining external capital from financial institutions, which affects the capital structure choice in companies.