A Study on the Firm-Level Determinants of Capital Structure for Micro, Small and Medium Enterprises Using Financial Disclosures in India

Abstract

The study was carried out based on financial disclosure, which has been analyzed to investigate the effect of different factors on the capital structure of micro, small and medium enterprises in India. Using the empirical data from the CMIE Prowess database (which includes 1524 SMEs for the period 2006-13) and listed SME samples, the study shows the variable definitions, descriptive statistics, trends of debt ratio and correlation matrices. The study highlights that with the assumption that the relationship between leverage and growth and tangibility is small and insignificant, the growth, profitability and liquidity and also scale and the non-debt tax shield support the pecking order argument. The percentage of the short-term debt ratios in the other categories of ratios to total debt was around 77% during the period between 2014 and 2019. Listed SME leverage decreased by 44.44%, from 0.90 in FY18 to 0.50 in FY24. The average between the measures of leveraging and profitability was negative: -0.054. Reportedly, SMEs are much more reliant on their internal financing and short-term loans due to the lack of assessment information on the lenders' part to extend long-term financing to SMEs, with a lack of transparency in the financial status of the borrowers. The final finding from the research is the need to look at structural conditions in policy solutions to overcome SME's financial constraints.