Journal of Corporate Finance: Andrea MC Namara, Pierluigi Murro, Sheila O'Donohoe

Journal of Corporate Finance 43 (2017) 122138
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Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin
Countries lending infrastructure and capital structure

determination: The case of European SMEs
Andrea Mc Namara a, Pierluigi Murro b, Sheila O'Donohoe c,
a
National University of Ireland, Galway, Ireland
b
LUMSA University, Rome, Italy
c
Waterford Institute of Technology, Ireland
a r t i c l e i n f o a b s t r a c t
Article history: We test in a European context the impact of countries' lending infrastructure on SMEs (small
Received 2 November 2016 and medium sized enterprises) capital structure. Devised from Berger and Udell (2006), this in-
Received in revised form 15 November 2016 frastructure is comprised of the information, legal, judicial, bankruptcy, social, tax and regula-
Accepted 15 December 2016
tory environments. We nd that SME debt is higher in countries with more efcient
Available online 23 December 2016
bankruptcy environments in terms of debt recovery and in countries with less stringent regu-
latory environments by way of lower capital regulatory requirements for banks. Components of
JEL classication: the lending infrastructure are found to differ with debt maturity. Long-term debt is synony-
G31
mous with efcient bankruptcy environments, whilst the information and legal environments
G14
matter more for short-term debt. The regulatory environment is important for both long-
G20
term and short-term debt. Our results also lend support for the Pecking-Order, Trade-Off and
Keywords: Agency theories of capital structure.
SMEs
2016 Elsevier B.V. All rights reserved.
Capital structure
Lending infrastructure
1. Introduction
Exactly what determines the capital structure of privately held rms remains a fundamental and unresolved issue in the nance
literature (Cole, 2013). Yet, the capital structure debate has not remained static, rather it has evolved over time from the trade-off
theory, the predominant focus of the 1970s and 1980s to the pecking order theory in the 1980s and more recently to incorporate
the institutional setting in the 1990s (Alves and Francisco, 2015). Initially drawing on work of Rajan and Zingales (1995) along with
the law and nance literature of La Porta et al. (1997, 1998), institutional settings are found to inuence capital structure decisions.1
However, a large body of the literature, studying countries' institutional settings, has focused to date on publicly listed rms, with
particular emphasis on the impact of investor protection and nancial development. Much less is known about the impact of these
settings for privately held small and medium sized enterprises (SMEs)2 apart from Hall et al. (2004), Beck et al. (2008) and Psillaki
and Daskalakis (2009), whose analysis is conned to either indirect effects or to a limited set of institutional factors.
Our study builds on this emerging strand of literature as we examine the impact of the lending infrastructure on the capital
structure of European SMEs. Berger and Udell (2006) introduce the concept of a country's lending infrastructure, referred to as
Corresponding author.
1
Studies include: Demirg-Kunt and Maksimovic (1999), Booth et al. (2001), Bancel and Mittoo (2004), De Jong et al. (2008), Gungoraydinoglu and ztekin (2011),
and Fan et al. (2012).
2
Abbreviations: SMEs Small and Medium Sized Enterprises; UK United Kingdom; SBA Small Business Act; NACE Statistical Classication of Economic Ac-
tivities; GDP Gross Domestic Product; EBIT Earnings Before Interest and Taxes; ECB European Central Bank.
http://dx.doi.org/10.1016/j.jcorpn.2016.12.008
0929-1199/ 2016 Elsevier B.V. All rights reserved.
A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138 123
rules and conditions that affect nancial institutions' ability to lend. The term, lending infrastructure captures much of the insti-
tutional setting of a country. Studies which focus on the institutional setting within the capital structure debate employ many
terms, to include differences in nancial and legal institutions (Demirg-Kunt and Maksimovic, 1999), cross country determi-
nants (Bancel and Mittoo, 2004), country specic factors (De Jong et al., 2008), country level determinants (Gungoraydinoglu
and ztekin, 2011) and the institutional environment (Fan et al., 2012). Given the lending infrastructure commands a similar
meaning to that of these terms, it is thus used to evaluate the institutional setting of a country. Dened by Berger and Udell
(2006) as comprising of the information, legal, judicial, bankruptcy, social, tax and regulatory environments, this infrastructure
differs across nations.
We test the impact of this infrastructure not only on total debt but also on short and long-term debt. Shorter debt maturities
help mitigate agency conicts manifesting from managerial over or underinvestment (Myers, 1977; Childs et al., 2005) which are
more prevalent in SMEs because of their opaqueness, concentrated ownership structure and lower access to long term debt (see,
e.g., Daz-Daz et al., 2016). To date, little attention has been afforded to examining a country's lending infrastructure and SMEs'
debt maturity with the exception of Hernndez-Cnovas and Koter-Kant (2011).
We use panel data drawn from across nine European countries from 2005 to 2011 and by considering this time period, we are
able to compare the results before and during the most recent global nancial crisis. We decided to exclude the period after the
2011, as the different macro conditions among the countries could affect our results. Moreover, we think that results for the
20052011 period are still relevant nowadays as the mechanisms through which institutional factors affect rms' behaviour are
sufciently persistent during the years. Indeed, whilst there is variation in the lending infrastructure variables across countries,
there is little variation over time, highlighting the relevance of this study in today's market. Europe is a natural setting for our
study. The European nancial system can be described as strongly bank-based (Langeld and Pagano, 2016), where the signicant
reliance on bank nance for SMEs (Popov and Udell, 2012) reinforces the importance of countries' lending infrastructure in the
capital structure of SMEs.
Our results suggest that countries' lending infrastructure inuences SMEs capital structure. Notably, SME debt is higher in
countries with more efcient bankruptcy environments in terms of debt recovery and in countries with less stringent regulatory
environments by way of lower capital regulatory requirements for banks. In the absence of the control variables, many of the
lending infrastructure components appear signicant. These include the information, legal and regulatory environments together
with the bankruptcy and regulatory regimes. The lending infrastructure differs with debt maturity. In particular, the regulatory
environment matters for both long and short-term debt. More efcient bankruptcy regimes are synonymous with long-term
debt in contrast to the signicance of the information and legal environments for short-term debt. Our results also lend support
for the Pecking-Order, Trade-Off and Agency theories of capital structure.
The contribution of this paper is threefold. First, we test Berger and Udell's (2006) lending infrastructure framework in a Eu-
ropean context, using direct measures of country level factors and a more complete set of country factors unlike a number of pre-
vious studies. Second, we fuse Berger and Udell's (2006) lending infrastructure model from the banking literature into the capital
structure domain and test how it resonates with the key capital structure theories (pecking order, agency and trade-off theories).3
Finally, in testing the impact of the lending infrastructure on SMEs debt maturity, we shed light on the determinants of SMEs -
nancing decisions, in particular their loan structure.
The paper is organised as follows: Section 2 presents the related literature and hypotheses whilst Section 3 describes the data,
methodology, variables and univariate statistics. The empirical evidence is reported in Section 4 and Section 5 concludes.
2. Related literature and hypotheses
The presence of asymmetric information is particularly acute for SMEs (Binks and Ennew, 1996; Berger and Udell, 1998; Ferri
and Murro, 2015) where the privacy of contracts, limited accounting disclosure and the minimal presence in public markets ren-
ders information opacity a dening characteristic of small business nance (see, e.g., Berger and Udell, 1998). The sharing of credit
information is one such mechanism to reduce information asymmetries, where private credit bureaus and public credit registries
facilitate this exchange (Kallberg and Udell, 2003; Jappelli and Pagano, 2002). In particular, the sharing of credit information can
facilitate in solving information problems between SMEs and their external nanciers (Kallberg and Udell, 2003). It also serves to
lower the cost of adverse selection and moral hazard (Zhang, 2016). Given the premise of SMEs' preference for external debt over
equity (under the Pecking Order Theory), this information sharing results in more bank nancing and in higher levels of leverage.
Hence, H1 suggests:
H1. SME rm leverage is higher in countries where there is greater sharing of credit information between lenders and credit
reporting service providers, namely credit bureaus and credit registries.
Inherent in the capital structure debate surrounding agency theory is the tension between management and external nan-
ciers arising from the separation of ownership and control (Jensen and Meckling, 1976). This conict gives rise to agency costs
that can be greater for smaller rms given that imperfect information is more prevalent (Berger and Udell, 1998). Agency costs
3
Our study is timely, given the signicance of European SMEs for economic growth (European Commission, 2014), but also due to their funding challenges posed by
the severity of the recent European sovereign debt crisis (Wehinger, 2014).
124 A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138
will be more synonymous with debt for SMEs, given their reliance on debt, hence, the importance of creditor rights protection
rather than shareholder protection.
Minimising conicts of interest and information asymmetries remains contingent on an effective legal system such that the use
of debt covenants and the signicance of duciary responsibilities remain integral to their purpose (Demirg-Kunt and
Maksimovic, 1998). There is a need for such a system in terms of its ability to mediate disputes and enforce contracts, in particular
the efciency of the state in enforcing property rights (Demirg- Kunt and Maksimovic, 1998, pp. 2113). Stronger creditor pro-
tection facilitates credit market development (Djankov et al., 2007; Haselmann et al., 2010; Cho et al., 2014). Hence, better cred-
itor rights result in more loans being secured (Qian and Strahan, 2007). In a similar vein, the lender's perspective suggests that
strong protection of property rights is conducive to small rms availing of formal sources of external nance (Beck et al., 2008;
Haselmann and Wachtel, 2010). In contrast, stronger creditor rights protection makes managers more risk averse and hence de-
ters them using debt for fear of loss of control in the event of nancial distress (see, e.g., Acharya et al., 2011; Fan et al., 2012 and
Vig, 2013). Known as the liquidation bias hypothesis (Vig, 2013), this asserts that stronger creditor rights will instil a greater fear
of bankruptcy among borrowers resulting in the use of less debt (Acharya et al., 2011; Fan et al., 2012 and Vig, 2013). Acknowl-
edging the borrower's view, H2 suggests:
H2. SME rm leverage is higher in countries where there is less private property protection.
Complementary to the legal environment, which species the commercial laws relating to property rights, the judicial environ-
ment denes how well such laws are enforced in commercial disputes (Berger and Udell, 2006). Both Demirg-Kunt and
Maksimovic (1998) and Djankov et al. (2007) illustrate the importance of an efcient judicial system on aggregate credit in coun-
tries. Under the realm of agency problems, La Porta et al. (2000) allude to the law in terms of its content and quality of enforce-
ment together with Beck et al. (2005). With more efcient judicial environment, agency costs are expected to be minimised. Thus,
H3 suggests:
H3. SME rm leverage is higher in countries where there is greater efciency of enforcement in the judicial environment.
Bankruptcy costs inuence rms' capital structure (Rajan and Zingales, 1995), whilst the bankruptcy environment determines
the enforcement of bankruptcy resolutions, i.e. the efciency of enforcement (Berger and Udell, 2006). This efciency consists of
three stages; ex-ante, interim and ex-post. Most studies focus on examining either the interim and ex-post stage given the greater
availability of proxies (Couwenberg and De Jong, 2008). Succurro (2012) asserts that a more efcient bankruptcy regime
strengthens creditors' powers and acts as a reassurance to them, thus making it easier for rms to secure credit. Hence, H4 suggests:
H4. SME rm leverage is higher in countries where there is greater efciency in the bankruptcy environment.
Under the trade off theory, DeAngelo and Masulis (1980) highlight fundamental leverage-related costs including bankruptcy
costs, loss of non-debt tax shields and agency costs. Bradley et al. (1984) suggest that the trade-off between the tax advantage of
debt and the leverage-related costs denes the optimality of the capital structure. Conventional wisdom purports high bankruptcy
costs have an adverse effect on rm leverage (De Jong et al., 2008). High bankruptcy costs are expected to result in less efciency
in the enforcement of the bankruptcy environment. Hence, this reinforces Hypothesis 4.
In an effort to minimise problems of adverse selection and moral hazard, close bank-borrower relationships can also be
employed (Mac an Bhaird and Lucey, 2010; Bartoli et al., 2013). A close relationship provides the bank with a better understand-
ing of the borrower such that resources can be deployed more efciently to address borrowers' needs. This relationship can also
reduce problems of adverse selection (Binks and Ennew, 1996; Mac an Bhaird and Lucey, 2010). One measure of the bank-bor-
rower relationship is trust, which is perceived as a less traditional measure (Hernndez-Cnovas and Martnez-Solano, 2010).
In particular, generalised trust (associated with the broader community) is perceived as a more accurate measure of trust
(Guiso et al., 2011). Closer bank-borrower relationships through greater trust are expected to minimise agency costs inherent
with lending. Hence, H5 suggests:
H5. SME leverage is higher in countries where there is greater trust.
Aligned with the thrust of the static trade-off theory, emphasis is placed on debt tax advantages where scholars allude to the
tax deductibility of interest payments (Sogorb-Mira, 2005; Lpez-Gracia and Sogorb-Mira, 2008). Haugen and Senbet (1986, pp. 5)
posit in the absence of other debt related costs or tax induced differential returns, the relatively favourable treatment of interest
expenditures leads to a preference for debt nancing by rms. Graham (2003) refers to the key trade-off implications, consistent
with Modigliani and Miller such that rms are incentivised to nance with debt with higher corporate tax rates. Djankov et al.
(2010) nd countries with effective tax rates were positively correlated with a rm's debt level. Hence, H6 suggests
H6. SME leverage is higher in countries where there are higher effective tax rates.
Finally, adhering to the regulatory environment, Berger and Udell (2006) allude to capital regulation, banking supervision and
the structure of nancial institutions. Following the occurrence of more stringent capital requirements for banks, Mac an Bhaird
and Lucey (2010) suggest that SMEs may have to provide more personal assets to secure bank credit. Whilst collateral reduces
agency costs, thus increasing rm leverage, the use of more personal assets may generate personal loss and distress for the
SME owner. Hence, H7 suggests:
H7. SME rm leverage is lower in countries where there are higher capital regulatory requirements for banks.
3. Materials and method
3.1. Empirical model and data description
To evaluate if countries' lending infrastructure determine SME rm leverage we use a random effects model,4 estimated as
it xit zit t i it 1
where xit is a vector of variables that are proxies of the lending infrastructure in line with Berger and Udell (2006). zit is a vector
of control variables for rm characteristics, country macroeconomic and credit supply conditions. t is a vector of year xed ef-
fects. i is a random variable that varies cross sectionally but is constant over time (Brooks 2008, pp. 498). It has zero
mean, is independent of the individual observation error term (it), has constant variance 2 and is independent of the explan-
atory variables, (xit) (Brooks, 2008, pp. 498).
Firm level data is taken from the Bureau Van Dijk Amadeus database (Amadeus, hereafter). The denition of a SME, per the
sample selection, is based on the criteria provided by the European Commission (2011). These include rms with b 250 em-
ployees, whose turnover does not exceed 50 million Euro or their annual balance sheet does not exceed 43 million Euro
(European Commission, 2011). These rms are also private and independent (see Table A.1 for the sampling criteria).
The study focuses on the period 20052011 and this enables us to compare the results before and during the recent global
nancial crisis. We believe that results for the 20052011 period are still relevant nowadays as the mechanisms through which
institutional factors affect rms' behaviour are sufciently persistent during these years. This is further reinforced given the min-
imal variation of lending infrastructure variables over time. These variables do vary however across countries.
Moreover, the sample is ltered for rms which have nancial data availability for the years required. To minimise
endogeneity issues,5 all independent variables are lagged one year, except for the variables trust and capital regulatory index.6
Appendix 2 explains the steps taken to clean the data. Table 1 presents the nal sample of the study (i.e. 34,564 rm observations
over 9 European countries). All rms included are non-nancial. The nine countries comprise of Austria, Belgium, Finland, France,
Germany, Greece, Italy, Portugal and the United Kingdom (UK). The inclusion of the UK, a market based economy facilitates a
comparison of SME capital structures between market based and bank based economies (Antoniou et al., 2008). The large number
of rm observations from Italy does heavily skew the sample, a similar observation was made by Psillaki and Daskalakis (2009) in
terms of French observations. This represents a limitation of our study.
To compare the coverage of the nal sample, data from the Small Business Act (SBA) Fact Sheet by the European Commission
(2016) and the Structural Business Statistics, Eurostat (2016) is used. The SBA fact sheet presents the number of rms, employ-
ment and the value added of rms and therefore provides the population of rms in a country. To determine the representative-
ness of the nal sample by rm size, rms are divided into three groups based on the number of employees.7 Jeveer (2013) in
studying the capital structure of rms from ten Western European countries, employs a similar approach comparing the coverage
of her nal sample with data from Enterprises in Europe by the European Commission and Eurostat. Table A.3 provides the cor-
relations of rm size for each country in our sample. The representativeness of the Amadeus data varies across countries with Bel-
gium, France, Italy and Portugal well represented. Austria, Finland, Germany, Greece and the UK are not well represented.8
To determine the representativeness of the nal sample by industry, data from Eurostat (2016) Structural Business Statistics is
used.9 Our nal sample from Amadeus uses NACE Rev.2. Table A.3 presents also the correlations of industries for each country in
our sample. Overall, the industry representativeness of the nal sample is relatively good.10
4
To evaluate the effect of countries' lending infrastructure on SME rm leverage, both the xed effects model and the random effects model can be employed. After
conducting the Hausman test however, the random effects model is chosen to conduct the baseline estimation model. The xed effects model is used as part of robust-
ness testing.
5
Alves and Ferreira (2011) employ independent variables lagged one year to avoid issues of reverse causality whilst Rajan and Zingales (1995) lag their explanatory
variables one period to minimise endogeneity concerns.
6
Due to data availability issues, the following is used for trust: for the year 2011, the trust variable 2010 is used. For the years 20102009, the trust variable 2008 is
used. For the year 20082007, the trust variable 2006 is used. For the years 20062005, the trust variable 2004 is used (Greece: For the year 2011, the trust variable 2010
is used. For the years 20102009, the trust variable 2008 is used. For the years 20082005, the trust variable 2004 is used. Italy: For all years [20112005], the trust
variable 2004 is used (see European Social Survey (2012) for data details). Due to further data availability issues, the following is used for the capital regulatory index.
For the years 20112008, the capital regulatory index in 2011 is used (Survey IV) and for the years 20072005, the capital regulatory index in 2006 is used (Survey III)
(see, Barth et al. (2013) for survey details).
7
Firms are divided into 3 groups based on the number of employees i.e. micro: 09 employees, small: 1049 employees and medium: 50249 employees. Amadeus
data is for 2010 and EU data from SBA Fact Sheet is for 2010. Jeveer (2013) also employs a similar approach.
8
The main reason for this problem is that Amadeus data for Austria, Finland, Germany, Greece and the UK overestimate the share of small and medium sized enter-
prises. This represents a limitation of the data.
9
The Structural Business Statistics provides annual enterprise statistics by size class for all industries in NACE Rev.2 (Annual enterprise statistics by size class for spe-
cial aggregates of activities (NACE Rev. 2) [sbs_sc_sca_r2]) except for Other Service Activities, Arts, Entertainment & Recreation, Human Health and Social Work Ac-
tivities and Education (Eurostat, 2016). All other industries except for these were evaluated for their representativeness. Amadeus data is for 2010 and the Structural
Business Statistics is for 2010. The SBA fact sheet was not appropriate here as it uses NACE Rev. 1.1.
10
In Finland however, there is an over representation of Manufacturing and an under representation of Wholesale and Retail Trade. Jeveer (2013) also found
Manufacturing was over represented in all countries of her sample.
Table 1
Final sample.
Country Austria Belgium Finland France Germany Greece Italy Portugal UK Total
Obs. 248 1,124 469 3,337 244 119 20,040 8,305 678 34,564
3.2. Measurement
The dependent variables are three: total debt ratio, short-term debt ratio and long-term debt ratio. The total debt ratio is de-
ned as the ratio of total debt to total assets (total debt consists of both short-term debt and long-term debt), taken from
Amadeus. The short-term debt ratio is dened as the ratio of loans (short-term nancial debts, e.g. to credit institutions and
part of long-term nancial debt payable within the year) to total assets, taken from Amadeus. Finally, the long-term debt ratio
is dened as long-term debt (long-term nancial debts, e.g. to credit institutions [loans, credits and bonds]) to total assets,
taken from Amadeus.
The independent variables include lending infrastructure proxies, rm characteristics and several control variables including
macroeconomic and credit supply conditions. Table A.4 shows the full denitions of the dependent and independent variables.
Representing the lending infrastructure characteristics, we consider proxies of the information, legal, judicial, bankruptcy, social,
tax and regulatory environments, derived from Berger and Udell (2006). Constituting the information environment, Berger and
Udell (2006) allude to the accounting infrastructure (i.e. accounting standards and credible independent accounting companies)11
and the sharing of information. This study focuses on the latter with information sharing captured by the credit depth of informa-
tion index,12 which measures the scope, accessibility, and quality of credit information (World Bank, 2012a). This exchange of
information occurs between lenders and credit reporting service providers, namely credit bureaus and credit registries (World
Bank, 2012a).
Appreciating the specicities of the legal, judicial and bankruptcy environments, Berger and Udell (2006, pp. 2957) refer to the
legal environment which consists of the commercial laws that specify the property rights associated with a commercial transac-
tion whilst the judicial and bankruptcy environments determine the enforceability of these laws amidst commercial and bank-
ruptcy debacles. Comprising of a country's legal environment, the property rights measure is employed (Heritage Foundation,
2013) with greater protection perceived to be synonymous with a more efcient legal system.
The efciency of a country's judicial system in resolving disputes is measured in terms of the cost, time and procedural com-
plexity of enforcing a contract (World Bank, 2012b). Arguably, whilst the cost, time and procedural complexity capture a different
dimension of judicial efciency, each indicator is derived from the same commercial sale dispute in the local courts of each coun-
try (World Bank, 2012b). Hence, all three dimensions of efciency can serve as a close substitute to each other. Such indicators
can represent the judicial environment in which Berger and Udell (2006) believe this environment serves as a barometer for
the enforceability of law. The lower the costs and time and the fewer the number of procedures, the more effective the commer-
cial dispute resolution will be (World Bank, 2012b). These measures are based on the work of Djankov et al. (2003).
To measure the bankruptcy environment, we use time, cost and recovery rate in recovering a debt (World Bank, 2012c). All of
these are perceived to capture different dimensions of bankruptcy efciency. Derived from the same insolvency proceedings
involving domestic rms and the strength of the legal environment (World Bank, 2012c), we perceive all three dimensions to
be a close substitute to each other and are based on the work of Djankov et al. (2008). We perceive more efcient bankruptcy
systems to be less time consuming, less costly in recovering a debt and result in higher recovery rates compared with more in-
efcient systems (Djankov et al., 2008).
Considering the social environment, we include a measure for trust. Guiso et al. (2011) purports fairness and trustworthiness
are integral for economic transactions such that the belief that others are unfair or cannot be trusted will minimise their involve-
ment in any such activities. Differentiating between personalised trust and generalised trust, this study provides a measure for
generalised trust from the European Social Survey (2012). Referring to the tax environment, the effective tax rate of the rm is
employed, dened as the total ratio between tax and earnings before taxes (from Amadeus database). Appreciating the specic-
ities of the regulatory environment, we employ a bank capital regulatory index, based on the work of Barth et al. (2013).13
We include a comprehensive range of explanatory variables as controls in the regressions. To account for the fact that more
protable, larger, older and more capital-intensive rms could have a different propensity to use debt, we include rm protabil-
ity (EBIT on total assets), rm size (natural log of assets), capital tangibility (tangible assets on total assets), and age (years from a
rm's inception). In addition, we include industry dummy variables to account for sectoral differences in the propensity to par-
ticipate in supply chains. We further control for heterogeneous local socioeconomic conditions by including the GDP annual
growth rate (World Bank, 2013a) and the ination rate (ECB, 2013). Demirg-Kunt and Maksimovic (1998. pp. 2112) posit
11
Given the adoption of international accounting standards across the European Union, to facilitate the harmonisation of nancial information (Europa, 2013), the
employment of accounting standards are perceived inappropriate for this study.
12
In more recent years, the World Bank has amended this index, to be called the depth of credit information index. The credit depth of information index was on a
scale from 0 to 6. The depth of credit information index is on a scale from 0 to 8 (World Bank, 2012a).
13
In particular, this index is the sum of the overall capital stringency and the initial capital stringency (Barth et al., 2013). The overall capital stringency indicates
whether the capital requirement reects certain risk elements and deducts certain market value losses from capital before minimum capital adequacy is determined
(Barth et al., 2013, pp. 54). The initial capital stringency indicates whether certain funds may be used to initially capitalize a bank and whether they are ofcially (Barth
et al., 2013, pp. 54).
ination gives evidence on whether the local currency provides a stable measure of value to be used in long-term contracting.
Moreover, we control for the competitive conditions in the banking market, by inserting the bank concentration ratio, taken
from the Global Financial Development Database (World Bank, 2013b). Finally, we include the 10 Year Government Bond Yield
(Thomson One) and deposits per GDP (Global Financial Development Database, World Bank, 2013b), to control for the supply
of credit conditions.
3.3. Summary statistics
Tables 2 and 3 report the descriptive statistics for the entire sample and per country respectively. SMEs in Belgium, Finland,
Germany, Greece, Portugal and the UK appear more indebted than their counterparts in Austria, France and Italy. Similarly,
there is some cross country variation in the lending infrastructure with information environment deemed more efcient (in
terms of the exchange of credit information between lenders and credit reporting service providers) in Austria, Germany and
the UK. Finland has the most efcient legal environment in terms of higher property rights in contrast to Greece. Equally, Austria
and Finland have the most efcient judicial environments in contrast to Italy and the UK whilst Finland and Belgium have the
most efcient bankruptcy environments. Finally, Finland has the highest level of trustworthiness; Germany has the highest effec-
tive tax rate whilst France has the most stringent bank capital regulatory environment.
4. Empirical evidence
4.1. Baseline estimation
Table 4 presents the baseline results. Column 1 includes the proxies for the lending infrastructure, namely the information,
legal, judicial, bankruptcy, social, tax and regulatory environments, derived from Berger and Udell (2006). Almost all components
of the infrastructure appear important determinants of SME rm debt. SME total debt is higher where there is greater sharing of
credit information between lenders and credit reporting service providers which is consistent with our Hypothesis 1 and litera-
ture Kallberg and Udell (2003) and Jappelli and Pagano (2002). The sharing of credit information facilitates in reducing informa-
tion asymmetries (Kallberg and Udell, 2003). Private credit bureaus and public credit registries play a key role in reducing such
asymmetries (Jappelli and Pagano, 2002). Our results also support the pecking order theory where the sharing of credit informa-
tion reduces information asymmetries. Equally, total debt is higher in less efcient legal systems, measured by property rights.
This result supports Hypothesis 2 and the liquidation bias, whereby greater creditor protection results in rms using less debt
for fear of losing control of the business in the event of nancial distress (Acharya et al., 2011; Cho et al., 2014). Moreover,
this nding is in line with the borrower's view of lending and is pertinent in the case of SME owner managers (Vig, 2013).
More efcient judicial environments, in terms of fewer procedures to enforce a contract, are conducive to higher total debt,
supporting Hypothesis 3 and agency theory also. Similarly, total debt is higher in a more efcient bankruptcy environment.
This result supports Hypothesis 4 and the trade-off theory, where lower bankruptcy costs through higher recovery rates increases
Table 2
Summary statistics - full sample.
Variables Mean Median Std. deviation Min Max Obs.
Total debt ratio 0.189 0.116 0.382 0.265 52.650 34,559

Long-term debt ratio 0.095 0.000 0.218 0.549 12.768 34,559
Short-term debt ratio 0.095 0.020 0.319 0.265 52.650 34,559
Credit index 5.055 5.000 0.585 4.000 6.000 34,559
Private property 63.622 70.000 11.817 50.000 95.000 34,559
Procedures to enforce a contract 37.194 38.000 4.381 25.000 41.000 34,559
Recovery rate 63.827 62.500 9.998 43.200 89.400 34,559
Trust 4.559 4.762 0.472 3.656 6.568 34,559
Capital regulatory index 5.796 6.000 1.690 3.000 9.000 34,559
Effective tax rate 0.412 0.350 15.643 1460.800 1268.917 32,627
Cost to enforce a contract 24.131 29.900 7.627 12.700 40.500 34,559
Time to enforce a contract 942.523 1210.000 384.892 235.000 1390.000 34,559
Cost to recover a debt 16.299 22.000 6.833 1.000 22.000 34,559
Time to recover a debt 1.792 1.800 0.258 0.900 2.000 34,559
Age 19.463 16.000 19.327 3.000 910.000 34,559
Tangibility 0.241 0.153 0.243 2.033 1.000 34,545
Protability 0.081 0.069 0.153 7.013 1.664 34,220
Log assets 12.905 13.618 2.602 1.648 19.007 34,559
Employees 15.194 8.000 24.783 0.000 246.000 27,040
Annual growth 0.540 1.553 2.344 8.269 5.652 34,559
Deposits per GDP 74.289 75.693 19.179 47.285 153.635 34,363
Ten year gov. bond 4.054 4.098 0.386 2.941 5.794 34,559
Ination 0.244 0.279 0.155 0.921 0.697 33,410
Bank concentration 64.567 61.280 19.819 34.958 99.973 34,559
128
Table 3
Summary statistics per country.
Austria Belgium Finland France Germany Greece Italy Portugal UK
A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138

Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev Mean Std. dev
Total debt ratio 0.097 0.200 0.265 0.240 0.277 0.412 0.108 0.921 0.274 0.243 0.250 0.201 0.177 0.199 0.227 0.287 0.312 0.862
Long-term debt ratio 0.000 0.000 0.209 0.225 0.220 0.400 0.046 0.095 0.211 0.219 0.097 0.159 0.068 0.131 0.148 0.256 0.202 0.855
Short-term debt ratio 0.097 0.200 0.056 0.102 0.057 0.075 0.062 0.917 0.063 0.100 0.154 0.169 0.109 0.146 0.079 0.164 0.110 0.137
Credit index 6.000 0.000 4.000 0.000 4.000 0.000 4.000 0.000 6.000 0.000 4.286 0.454 5.286 0.452 5.000 0.000 6.000 0.000
Private property 90.000 0.000 84.493 4.976 90.725 1.762 71.430 3.502 90.000 0.000 51.429 3.514 56.430 8.749 70.000 0.000 89.285 1.752
Procedure enforce 25.718 0.780 27.183 0.983 33.000 0.000 29.000 0.000 30.000 0.000 39.000 0.000 39.857 1.807 36.790 1.713 29.714 0.701
Recovery rate 72.526 0.820 86.462 0.572 88.338 0.799 46.185 1.330 81.270 0.927 44.757 0.985 60.330 2.904 72.641 2.180 85.403 1.419
Trust 5.311 0.179 4.972 0.132 6.509 0.045 4.458 0.068 4.824 0.078 3.879 0.070 4.762 0.000 3.862 0.165 5.290 0.077
Capital regulatory index 4.355 0.479 5.754 2.488 5.139 0.991 8.000 0.000 7.582 0.494 5.714 1.491 5.314 0.792 6.202 2.482 4.676 1.975
Cost enforce 14.410 2.483 17.700 0.000 13.300 0.000 17.400 0.000 14.400 0.000 14.400 0.000 29.900 0.000 13.881 0.530 39.178 2.243
Time enforce 397.000 0.000 505.000 0.000 276.493 64.000 390.000 0.000 395.180 3.044 880.857 79.779 1261.445 81.326 569.030 13.251 402.555 2.268
Cost recover 18.000 0.000 4.000 0.000 4.000 0.000 9.000 0.000 7.082 2.368 9.000 0.000 22.000 0.000 9.000 0.000 6.000 0.000
Time recover 1.100 0.000 0.900 0.000 0.900 0.000 1.900 0.000 1.200 0.000 2.000 0.000 1.800 0.000 2.000 0.000 1.000 0.000
Age 35.177 32.307 18.626 11.308 22.066 18.694 16.180 11.440 34.459 32.311 23.412 11.691 17.852 12.580 22.439 29.959 34.487 29.213
Tangibility 0.262 0.213 0.333 0.258 0.369 0.272 0.138 0.175 0.286 0.276 0.250 0.299 0.235 0.245 0.269 0.238 0.329 0.268
Protability 0.059 0.103 0.065 0.244 0.028 0.260 0.081 0.177 0.062 0.108 0.082 0.138 0.106 0.126 0.031 0.164 0.043 0.133
Effective tax rate 0.234 0.456 0.343 2.575 0.018 2.042 0.214 2.439 2.172 17.659 0.084 0.929 0.515 19.741 0.212 3.207 0.115 1.627
Log assets 11.618 2.477 13.598 1.163 15.061 1.376 6.065 1.105 10.241 1.610 14.517 0.854 13.905 1.047 13.246 1.326 11.349 2.680
Employees 54.385 59.136 12.060 20.713 43.384 42.886 8.087 13.545 91.495 58.109 14.151 8.017 10.338 10.508 17.992 23.307 89.187 61.840
Annual growth 1.532 2.453 1.909 1.863 1.605 4.261 1.193 1.857 1.203 3.117 0.639 4.060 0.170 2.493 0.832 1.684 1.047 2.433
Deposits per GDP 91.247 5.565 98.613 3.834 53.261 6.066 71.140 4.888 104.973 7.510 87.676 11.253 63.738 11.926 94.016 12.460 131.023 15.116
Ten year gov bond 3.875 0.361 3.899 0.359 3.772 0.405 3.803 0.391 3.675 0.477 4.514 0.736 4.122 0.355 4.016 0.364 4.301 0.477
Ination 0.193 0.160 0.227 0.309 0.032 0.437 0.184 0.135 0.173 0.158 0.460 0.118 0.249 0.111 0.269 0.175 0.312 0.139
Bank concentration 60.271 6.399 84.469 4.409 97.207 2.621 64.287 1.865 73.326 2.248 68.870 8.264 53.042 15.782 88.326 4.348 57.625 5.215
Table 4
Baseline estimation.
(1) (2) (3) (4)
Random Random Random Random
Variables Total debt ratio Total debt ratio Long-term debt ratio Short-term debt ratio
Credit index 0.0164 0.0283 0.0184 0.0501

(0.007) (0.025) (0.013) (0.021)
Private property 0.0014 0.0016 0.0004 0.0022
(0.000) (0.001) (0.001) (0.001)
Procedures to enforce a contract 0.0041 0.0017 0.0009 0.0006
(0.001) (0.002) (0.002) (0.001)
Recovery rate 0.0035 0.0058 0.0054 0.0009
(0.000) (0.003) (0.002) (0.002)
Trust 0.0073 0.0177 0.0116 0.0267
(0.007) (0.033) (0.013) (0.032)
Capital regulatory index 0.0051 0.0035 0.0023 0.0014
(0.001) (0.001) (0.001) (0.001)
Effective tax rate 0.0000 0.0000 0.0000 0.0000
(0.000) (0.000) (0.000) (0.000)
Age 0.0011 0.0007 0.0004
(0.001) (0.000) (0.000)
Tangibility 0.1534 0.1139 0.0080
(0.033) (0.009) (0.019)
Protability 0.2757 0.0656 0.1993
(0.101) (0.021) (0.098)
Log assets 0.0164 0.0122 0.0084
(0.004) (0.003) (0.003)
Annual growth 0.0007 0.0026 0.0017
(0.004) (0.004) (0.003)
Deposits per GDP 0.0027 0.0015 0.0010
(0.002) (0.001) (0.001)
Ten year gov. bond 0.0024 0.0016 0.0095
(0.019) (0.024) (0.007)
Ination 0.0079 0.0090 0.0009
(0.018) (0.012) (0.015)
Bank concentration 0.0008 0.0001 0.0007
(0.001) (0.000) (0.001)
Constant 0.1869 0.6575 0.5179 0.0329
(0.038) (0.285) (0.167) (0.175)
Observations 32628 31296 31296 31296
Number of rm ID 4987 4977 4977 4977
Hausman test (p value) 0.2879 0. 8803
Note: The table reports regressions coefcients. The dependent variable and the estimation method are reported at the top of each column. All the regressions
include year xed effects and sector dummies. In parentheses are robust standard errors.
Coefcient signicant at 10% condence level.
Coefcient signicant at b1% condence level.
rm leverage. Finally, SME total debt is higher when bank capital requirements are less stringent, consistent with what was
depicted under Hypothesis 7.
In column 2, we add the control variables to the regression model. Notably, the lending infrastructure remains important but
only in terms of the bankruptcy and regulatory environments. The signicant results for each of these concurs with those found in
column 1, whereby SME total debt is higher in more efcient bankruptcy environments and in less stringent bank capital regu-
latory requirements. Columns 3 and 4 relate to long-term and short-term debt ratios respectively. Interestingly, the information
and legal environments prove important determinants of the short-term debt ratio (column 4) which is higher where there is
greater sharing of credit information and less private property protection. The results surrounding private property protection
are similar to those of Demirg-Kunt and Maksimovic (1998, 1999) and Diamond (2004) who nd short term debt is higher
when enforcement costs are high and credit protection is weak. In contrast, the bankruptcy environment is deemed an important
predictor of the long-term debt ratio (column 3) which again is higher in more efcient bankruptcy regimes. This is not surprising
given the higher perceived risk of this form of debt. Equally and just as for total debt, the regulatory environment appears impor-
tant, irrespective of debt maturity as less stringent bank capital regulatory requirements is conducive to both long-term and short-
term debt respectively.
All rm factors appear to be important determinants of SME rm debt. Younger rms use more debt and this holds true for
both long-term and short-term debt and provides support for the pecking order theory. This nding is in line with Hall et al.
(2004), who nd young rms use more short-term debt, positing younger rms have less time to retain earnings and concomi-
tantly, will therefore need to borrow. Mac an Bhaird and Lucey (2010) nd the use of long-term debt is negatively related to rm
age, implying there is maturity matching where over time, rms will use less debt and more retained earnings to fund investment
opportunities. More protable rms are shown to use less debt again holding for both long-term and short-term debt, suggesting
support for the pecking order theory and concurs with Hall et al. (2004) and Psillaki and Daskalakis (2009). Equally, rms with
more tangible assets have higher total debt and this holds true for long-term debt also, suggesting such assets can be used as col-
lateral when raising debt, consistent with the minimisation of agency costs. This nding of long-term debt is in line with Hall et al.
(2004), Kirch and Terra (2012), Custodio et al. (2013) and Awartani et al. (2016). Finally, the positive and signicant relationship
between the log of assets, a measure of rm size, and total debt reects how larger rms use more debt. This result also holds for
both long-term and short-term debt. The positive relationship between total debt and size concurs with Psillaki and Daskalakis
(2009) who nd a positive relationship between size and leverage. Hall et al. (2004) nd a positive relationship between size
and long-term debt but a negative relationship between size and short-term debt. Hall et al. (2004) expect smaller rms to
incur difculties in raising long-term debt and hence, in the absence of long-term debt, will use more short-term debt. Thus,
short-term debt has a negative relationship to rm size (Hall et al., 2004). Yet, we nd short-term debt has a positive relationship
to rm size, suggesting smaller rms may be using other sources of nance i.e. internal funds, funds from family and friends as
opposed to using long or short term debt.
Of the macroeconomic and credit supply factors, only deposits per GDP appear important for the long-term debt ratio, which is
higher with more credit supply.
In summary, some components of the lending infrastructure environments are shown to be important determinants of SME
rm debt, most notably the bankruptcy and regulatory environments. SME rm debt is higher in countries with a higher bank-
ruptcy recovery rate and lower bank capital regulatory requirements. When controls are omitted, more lending infrastructure en-
vironments appear important, in addition to the bankruptcy and regulatory environments, namely the information, legal and
judicial environments. Considering debt maturity, the information and legal environments are important determinants of short-
term debt, whilst the bankruptcy environment is an important determinant of long-term debt. The regulatory environment is im-
portant for both long-term and short-term debt. Moreover, younger, more tangible, less protable and larger SMEs have more
debt. With regards debt maturity, the age, protability and size of a rm are important for long-term and short-term debt whilst
rm tangibility is important for only long-term debt. Finally, SME debt is higher in countries with higher deposits per GDP.
4.2. Fixed effects
As a robustness check, in Table 5 we display the results of regressions using the xed effects model. Under the xed effects
model, the lending infrastructure environments appear important for SME total debt, but only the information, legal and regula-
tory environments. Results concur with those found under the baseline estimation model (random effects) with SME rm debt
higher in countries with greater sharing of credit information, less private property protection and lower capital regulatory re-
quirements. Considering the debt maturity, results under the xed effects model are similar to those under the baseline estima-
tion model. The information and legal environments are important determinants of short-term debt whilst the bankruptcy
environment is an important determinant of long-term debt. The regulatory environment is important for both long-term and
short-term debt. Of the rm factors, only rm protability is an important determinant of total debt. For long-term debt, the
age, tangibility, protability and size of an SME are important determinants where younger, more tangible, less protable and
larger SMEs have more long-term debt. Finally, considering the macroeconomic and credit supply factors, deposits per GDP is
an important determinant of total debt and long-term debt (more supply of credit increases total debt and long-term debt). An-
nual growth is important for both long-term and short-term debt where a rise in economic growth decreases long-term debt but
increases short-term debt.
4.3. Sample splits
In Table 6, we report the regressions for the total debt ratio on sub-samples. The sample is split by rm age, i.e. rms less than
16 years and rms 16 years or older more than 1614 (columns 1 and 2); rm size, i.e. rms with total assets less than 800,000
and rms with total assets equal to or greater than 800,000 (columns 3 and 4); and time period i.e. pre nancial crisis period
and the nancial crisis period post hoc (columns 5 and 6).
First, we partition the sample based on the age. Splitting the sample by rm age, the lending infrastructure environments,
namely the information, legal, bankruptcy and regulatory appear important for the capital structure of the older SMEs in contrast
to their younger counterparts. These results are similar to those of the baseline estimation model. Older SMEs are more likely to
have higher debt in countries with greater sharing of credit information, less private property protection, a higher recovery rate in
the event of bankruptcy and lower bank capital regulatory requirements.
Considering rm size, only the bankruptcy and regulatory environments are important for the capital structure of larger SMEs
in contrast to their smaller counterparts. Again, results are similar to those under the baseline estimation model. Larger SMEs are
more likely to have higher debt in countries with a higher recovery rate and lower capital regulatory requirements. In relation to
the time period, following the onset of the nancial crisis, only the legal environment appears important for SME debt. Following
the crisis, SME debt is more likely to be higher in countries with stronger private property protection. This differs from the earlier
results found in the baseline estimation model where SME rm leverage is higher in countries with less private property
14
16 years is the median age of the sample.
Table 5
Fixed effects.
(1) (2) (3)
Fixed Fixed Fixed
Variables Total debt ratio Long-term debt ratio Short-term debt ratio
Credit index 0.0295 0.0053 0.0348

(0.014) (0.011) (0.011)
Private property 0.0017 0.0001 0.0016
(0.001) (0.000) (0.001)
Procedures to enforce a contract 0.0020 0.0038 0.0018
(0.004) (0.003) (0.003)
Recovery rate 0.0024 0.0031 0.0007
(0.002) (0.002) (0.001)
Trust 0.0141 0.0161 0.0303
(0.034) (0.013) (0.033)
Capital regulatory index 0.0040 0.0023 0.0017
(0.001) (0.001) (0.001)
Effective tax rate 0.0000 0.0000 0.0000
(0.000) (0.000) (0.000)
Age 0.0095 0.0042 0.0053
(0.007) (0.002) (0.007)
Tangibility 0.1647 0.0863 0.0784
(0.104) (0.012) (0.103)
Protability 0.2140 0.0570 0.1569
(0.102) (0.017) (0.105)
Log assets 0.0129 0.0184 0.0055
(0.010) (0.004) (0.009)
Annual growth 0.0015 0.0020 0.0035
(0.002) (0.001) (0.002)
Deposits per GDP 0.0023 0.0017 0.0006
(0.001) (0.001) (0.001)
Ten year gov. bond 0.0031 0.0025 0.0006
(0.012) (0.003) (0.012)
Ination 0.0008 0.0059 0.0066
(0.012) (0.010) (0.008)
Bank concentration 0.0005 0.0001 0.0004
(0.000) (0.000) (0.000)
Constant 0.2594 0.4123 0.1529
(0.298) (0.240) (0.193)
Observations 31301 31301 31301
R-squared 0.008 0.018 0.004
Number of rm ID 4978 4978 4978
include sector dummies. In parentheses are robust standard errors.
protection, supporting the demand side view of lending (Acharya et al., 2011; Cho et al., 2014). Post the crisis however; SME rm
leverage is higher in countries with higher private property protection, reinforcing the supply side view of lending (Beck et al.,
2008). This suggests that after economic and nancial turbulence, the supply side of lending outweighs the demand side. Thus,
debt is more likely to be secured with stronger property protection (Beck et al., 2008), irrespective of SMEs' fear of losing control
of their business in the event of a default (Acharya et al., 2011; Cho et al., 2014).
Considering rm factors, regardless of rm size, rm age or time period, rm tangibility and rm protability are important
determinants of SME debt. Of the macroeconomic and credit supply factors, deposits per GDP, ination and bank concentration
are important. Younger SMEs are more likely to have higher debt in countries with higher deposits per GDP i.e. more supply
of credit where as older SMEs are more likely to have higher debt in countries with lower ination i.e. a more stable currency
value. Moreover, larger SMEs are more likely to have higher debt in countries with lower ination. These larger SMEs are also
more likely to have higher debt in countries with more concentrated banking markets. Yet, in the aftermath of the nancial crisis,
SMEs are more likely to have higher debt in countries with a less concentrated banking sector. The negative relationship between
rm debt and bank concentration is in line with the market power hypothesis in which less competitive banking markets, i.e.
more concentration reduces credit availability and increases the price for credit (Carb-Valverde et al., 2009). The positive rela-
tionship between rm debt and bank concentration, found for larger SMEs, is in line with the information hypothesis in which
less competitive banking markets, i.e. more concentration increases credit availability (Petersen and Rajan, 1995). With less com-
petitive markets, it is not as hard for creditors to internalise the benets of their lending relationship with credit constrained rms
and are thus more likely to lend to them (Petersen and Rajan, 1995). Finally, post the crisis, SMEs are more likely to have higher
debt in countries with more supply of credit, i.e. higher deposits per GDP.
Table 6
Sample splits.
(1) (2) (3) (4) (5) (6)
Age Size Financial crisis
Age b 16 Age 16 Tot assets b 800,000 Tot assets 800,000 20052007 20082011
Variables TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio
Credit index 0.0250 0.0362 0.0349 0.0234 0.6770 0.0463

(0.057) (0.016) (0.051) (0.022) (0.823) (0.042)
Private property 0.0012 0.0020 0.0012 0.0014 0.0354 0.0034
(0.002) (0.001) (0.002) (0.001) (0.041) (0.002)
Procedures to enforce a contract 0.0054 0.0001 0.0069 0.0021 0.0338 0.0051
(0.004) (0.002) (0.005) (0.003) (0.053) (0.005)
Recovery rate 0.0104 0.0049 0.0052 0.0053 0.0019 0.0025
(0.010) (0.001) (0.007) (0.002) (0.011) (0.002)
Trust 0.0429 0.0176 0.0284 0.0081 0.0582 0.0065
(0.062) (0.013) (0.045) (0.017) (0.089) (0.018)
Capital regulatory index 0.0030 0.0040 0.0020 0.0042 0.0891 0.0628
(0.002) (0.001) (0.002) (0.001) (0.103) (0.156)
Effective tax rate 0.0001 0.0000 0.0000 0.0000 0.0000 0.0001
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Age 0.0058 0.0005 0.0006 0.0024 0.0010 0.0010
(0.002) (0.000) (0.000) (0.000) (0.001) (0.001)
Tangibility 0.2303 0.0471 0.2109 0.0678 0.2073 0.0836
(0.047) (0.013) (0.051) (0.014) (0.043) (0.013)
Protability 0.3499 0.1483 0.3060 0.1516 0.3630 0.1012
(0.148) (0.017) (0.135) (0.018) (0.157) (0.029)
Log assets 0.0206 0.0187 0.0028 0.0268 0.0149 0.0199
(0.006) (0.003) (0.008) (0.005) (0.005) (0.004)
Annual growth 0.0063 0.0029 0.0012 0.0012 0.0234 0.0040
(0.010) (0.002) (0.007) (0.002) (0.017) (0.003)
Deposits per GDP 0.0073 0.0001 0.0043 0.0002 0.0104 0.0016
(0.004) (0.000) (0.003) (0.001) (0.007) (0.001)
Ten year gov. bond 0.0022 0.0029 0.0179 0.0205 0.2438 0.0198
(0.050) (0.012) (0.021) (0.014) (0.202) (0.025)
Ination 0.0646 0.0217 0.0315 0.0217 0.0620 0.0164
(0.042) (0.011) (0.033) (0.011) (0.073) (0.017)
Bank concentration 0.0014 0.0000 0.0011 0.0003 0.0005 0.0020
(0.001) (0.000) (0.001) (0.000) (0.001) (0.001)
Constant 1.8065 0.1051 1.0671 0.5227 0.0237 0.8159
(0.883) (0.200) (0.654) (0.206) (0.561) (0.635)
Observations 15222 16074 14892 16404 13941 17355
Number of rm ID 2827 3015 2921 2904 4847 4897
include year xed effects and sector dummies. In parentheses are robust standard errors.
5. Conclusion
There is an ever increasing recognition that countries' institutional setting inuences rms' capital structure (Rajan and
Zingales, 1995). Using this institutional lens much of the research to date has predominantly focused on publicly listed rms
with much less known about SMEs. This paper bridges this gap as it analyses the impact of countries' lending infrastructure on
the capital structure of a sample of European SMEs from 2005 to 2011. We draw on Berger and Udell (2006)'s conceptual frame-
work underpinning the lending infrastructure of countries in deriving proxies for country institutional settings. Incorporating this
framework from the banking literature with the mainstream theories of SME capital structure is one of the key contributions of
this paper. We hypothesise that SME leverage will be inuenced by the information, legal, judicial, bankruptcy, social, tax and reg-
ulatory environment of a country, having controlled for rm and industry effects as well as macroeconomic and credit supply con-
ditions. Furthermore, we test for the impact of these environments across SME debt maturity.
Our results nd that elements of countries lending infrastructure prove inuential determinants of SME leverage. Taken as a
whole, SME debt is higher in more efcient bankruptcy regimes and in less stringent regulatory environments around banks cap-
ital requirements. Furthermore, our cross-sectional analysis reveals differences in the determinants of short-term vis a vis long-
term debt, with the information, and legal environment inuential in explaining short-term debt and the bankruptcy environment
for longer term debt. The capital regulatory environment matters for both forms of debt. In particular, the impact of stringent
bank capital regulatory requirements on SME rm leverage illustrates a possible trade-off between the goals of bank stability
and funding SMEs.
Our results have implications for policy. First, inefcient bankruptcy regimes result in lower SME debt levels which in turn may
see less investment and lower job creation by SMEs. Anything policy makers can do to enhance bankruptcy environments would
be welcome. Second, the spillover effect of stringent bank capital requirements manifests itself by way of lower SME debt levels.
Hence, the need for policy makers to circumvent this by encouraging SMEs to consider alternative sources of funding apart from
bank lending. Third, the signicance of information sharing for SMEs short term debt suggest the roll out of this powerful mech-
anism should be encouraged by policy makers alike.
Our analysis is conned to much of Western Europe. Future work could incorporate countries from across Eastern Europe es-
pecially given the signicance of SMEs in these economies and the evolving nature of their institutional settings. Another exten-
sion would be to evaluate not only the quantity of information shared between SMEs and their lenders but also the quality of
what is shared and the subsequent implications for SME leverage.
Funding
This research did not receive any specic grant from funding agencies in the public, commercial, or not-for-prot sectors.
Acknowledgements
We wish to thank participants at the 2016 Entrepreneurial Finance Conference, Lyon, France, to those at the 2015 International
Financial Engineering and Banking Society (FEBS) Conference in Nantes, France, to those at the 2013 Workshop on SME Finance,
University of Strasburg, France and nally to participants at the 2012 British Accounting & Finance Annual Conference, Newcastle,
UK for all of their valuable comments. Financial support provided by the AIB Centre for Finance and Business Research at Water-
ford Institute of Technology is very gratefully acknowledged. Finally, we would like to thank Allen N. Berger and Gregory F. Udell.
All remaining errors are ours.
Appendix 1
Fig. A.1. The conceptual framework of Berger and Udell (2006).
Fig. A.2. Lending infrastructure as per the conceptual framework of Berger and Udell (2006).
Appendix 2. Data cleaning steps
Given the time period of the study and that all independent variables are lagged one year (t 1), 37,198 rm observations
constitute the sample of the study (i.e. 5314 rms multiplied by 7 years). A number of data cleaning steps are taken. All negative
values relating to short-term debt ratio, long-term debt ratio and total debt ratio are omitted from the sample. Owing to ineligi-
bility issues, the following industries were omitted: Financial and Insurance (NACE Rev. 2 K); Agriculture, Forestry and Fishing
(NACE Rev. 2 A) and Activities of Households as Employers: Undifferentiated goods and services producing activities of house-
holds for own use (NACE Rev.2 T). Given that there are missing values for short-term debt and long-term debt, total debt ratio
could not be calculated for a number of rm observations. Finally, a number of rms had 250 employees or more which violated
the sampling criteria and hence these rm observations were removed (see Table A.1). Given the few rm observations in Ireland
and Netherlands, these were removed from the nal sample (see Table A.2).
Table A.1
Criteria for rm selection (partly sourced from European Commission (2011), Amadeus and other studies).
Sampling criteria
1. The number of employees: min is 1 and max is 249.

2. Annual turnover (operating revenue): min 1 and max is 50,000,000.
3. Balance sheet total: min is 1 and max is 43,000,000.
4. Legal form: private.
5. Ownership: Bureau Van Dijk Independence Indicator Level of Independence is A,A,A. Amadeus denes independent as no participation in other
enterprises and no enterprise has a participation in yours or your minority partnerships.
6. Exclusion of subsidiaries.
Table A.2
Data cleaning steps.
Country Austria Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal UK Total
Firms 41 237 98 491 43 17 8 2924 9 1288 158 5314

Years 7 7 7 7 7 7 7 7 7 7 7 7
Obs. (1) 287 1659 686 3437 301 119 56 20,468 63 9016 1106 37,198
Neg. V (0) (0) (0) (1) (0) (0) (0) (12) (0) (3) (0) (16)
Obs. (2) 287 1659 686 3436 301 119 56 20,456 63 9013 1106 37,182
Industries (0) (91) (28) (91) (0) (0) (0) (413) (7) (462) (133) (1225)
Obs. (3) 287 1568 658 3345 301 119 56 20,043 56 8551 973 35,957
#Values (36) (444) (189) (0) (57) (0) (26) (0) (44) (245) (272) (1313)
Obs. (4) 251 1124 469 3345 244 119 30 20,043 12 8306 701 34,644
E 250 (3) (0) (0) (8) (0) (0) (0) (3) (1) (1) (23) (39)
Obs. (5) 248 1124 469 3337 244 119 30 20,040 11 8305 678 34,605
Countries (30) (11) (41)
Final 248 1124 469 3337 244 119 20,040 8305 678 34,564
Table A.3
Representativeness of nal sample.
Countries Correlations of rm size Correlations of industry
Austria 0.969 0.676

Belgium 0.944 0.932
Finland 0.768 0.174
France 0.975 0.870
Germany 0.847 0.656
Greece 0.181 0.839
Italy 0.803 0.623
Portugal 0.542 0.722
UK 0.791 0.593
Table A.4
Denitions and sources of dependent and independent variables.
This is dened as total debt to total assets. Total debt ratio is equal to the sum of short-term debt ratio and Source: The Bureau Van
Total debt ratio long-term debt ratio. Source: Bureau Van Dijk Amadeus Database. Dijk Amadeus database.
Short-term debt ratio This is dened as loans (short-term nancial debts e.g. to credit institutions and part of long-term nancial Source: The Bureau Van
debt payable within the year, bonds) / Total Assets. Source: Bureau Van Dijk Amadeus Database. Dijk Amadeus database.
Long-term debt ratio This is dened as long-term debt (long-term nancial debts e.g. to credit institutions [loans and credits], Source: The Bureau Van
bonds) / Total Assets. Source: Bureau Van Dijk Amadeus Database. Dijk Amadeus database.
Credit depth of The credit depth of information index measures the scope, accessibility, and quality of credit information Source: Doing Business
information index World Bank (2012a). Higher values on this scale (06) imply greater availability of credit information World Bank.
World Bank (2012a).
Property rights Private property rights measures the ability of individuals to accumulate private property, secured by clear Source: Heritage
laws that are fully enforced by the state Heritage Foundation (2013). Such a measure reveals the degree to Foundation.
which a country's laws protect private property rights and the degree to which its government enforces
those laws Heritage Foundation (2013).
Cost to enforce a The cost required to enforce a contract include no bribes, average attorney fees, court costs, including expert fees, Source: Doing Business
contract enforcement costs World Bank (2012b, pp. 8). Cost is recorded as a percentage of the claim, assumed to be World Bank.
equivalent to 200% of income per capita World Bank (2012b, pp. 9).
Time to enforce a The time required to enforce a contract includes the time to le and serve the case, time for trial and Source: Doing Business
contract obtaining judgment, time to enforce the judgment World Bank (2012b, pp. 8). Time is recorded in World Bank.
calendar days, counted from the moment the plaintiff decides to le the lawsuit in court until payment
World Bank (2012b, pp. 8).
Procedures to enforce Procedures required to enforce a contract include Any interaction between the parties in a commercial Source: Doing Business
a contract dispute, or between them and the judge or court ofcer, steps to le and serve the case, steps for trial and World Bank.
judgment, steps to enforce the judgment World Bank (2012b, pp. 8). Procedures are the list of procedural
steps compiled for each economy traces the chronology of a commercial dispute before the relevant court
World Bank (2012b, pp. 8).
Time to recover a debt The time required to recover a debt is from the company's default until the payment of some or all of the Source: Doing Business
money owed to the bank World Bank (2012c). The time for creditors to recover their credit is recorded in World Bank.
calendar years World Bank (2012c).
Cost to recover a debt The cost required to recover a debt include court fees and government levies; fees of insolvency Source: Doing Business
administrators, auctioneers, assessors and lawyers; and all other fees and costs (World Bank, 2012c). The World Bank.
cost of the proceedings is recorded as a percentage of the value of the debtor's estate (World Bank, 2012c).
Recovery rate The recovery rate is recorded as cents on the dollar recovered by secured creditors through reorganization, Source: Doing Business
liquidation or debt enforcement (foreclosure or receivership) proceedings World Bank (2012c). Indeed, the World Bank.
calculation takes into account the outcome: whether the business emerges from the proceedings as a going
concern or the assets are sold piecemeal. Then the costs of the proceedings are deducted World Bank (2012c).
Trust This variable relates to the following question: Generally speaking, would you say that most people can be Source: European Social
trusted, or that you can't be too careful in dealing with people? Please tell me on a score of 0 to 10, where 0 Survey.
means you can't be too careful and 10 means that most people can be trusted European Social Survey (2012).
Effective tax rate This is dened as total tax / earnings before taxes. Source: Bureau Van Dijk Amadeus Database. Source: The Bureau Van
Dijk Amadeus database.
Capital regulatory This is the sum of the overall capital stringency and the initial capital stringency. The overall capital Source: Barth et al.,
index stringency indicates whether the capital requirement reects certain risk elements and deducts certain (2013).
market value losses from capital before minimum capital adequacy is determined. The initial capital
stringency indicates whether certain funds may be used to initially capitalize a bank and whether they are
ofcially Barth et al., (2013, pp. 54)
Firm age This is dened as the year of the Bureau Van Dijk Amadeus Database - Year of Firm's Birth. Source: The Bureau Van
Source: Bureau Van Dijk Amadeus Database. Dijk Amadeus database.
Firm size This is dened as the natural log of the assets. Source: Bureau Van Dijk Amadeus Database. Source: The Bureau Van
Tangibility This is dened as tangible assets / total assets. Source: Bureau Van Dijk Amadeus Database. Source: The Bureau Van
Protability This is dened as earnings before interest and taxes / total assets. Source: Bureau Van Dijk Amadeus Source: The Bureau Van
Database. Dijk Amadeus database.
GDP annual growth The GDP growth rate is the annual percentage growth rate of GDP at market prices based on constant local Source: World Bank.
rate currency World Bank (2013a).
Ination Ination is the log difference of the Consumer Price Index ECB (2013), Beck et al. (2008). Source: European
Central Bank.
Bank concentration This is dened as the assets of three largest commercial banks as a share of total commercial banking Source: Global Financial
(%) assets. Total assets include total earning assets, cash and due from banks, foreclosed real estate, xed Development Database,
assets, goodwill, other intangibles, current tax assets, deferred tax assets, discontinued operations and World Bank.
other assets World Bank (2013b).
10 Year government This is the Benchmark Bond 10 year Redemption Yield. Source: Thomson One. Source: Thomson One
bond yield
Deposits per GDP This is dened as the total value of demand, time and saving deposits at domestic deposit money banks as a Source: Global Financial
share of GDP. Deposit money banks comprise commercial banks and other nancial institutions that accept Development Databasea,
transferable deposits, such as demand deposits World Bank (2013b). World Bank.
a
For more details on the Global Financial Development Database, see Martin ihk, Asl Demirg-Kunt, Erik Feyen, and Ross Levine, 2012. Benchmarking nancial
systems around the world. World Bank Policy Research Working Paper 6175, World Bank, Washington, D.C.
136
Table A.5
Correlation matrix.
A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138

TD SD LD CI PP Proc RR TR RG ETR Age Tang Prot LA AGR Depot GB Inf BC
TD 1.00
SD 0.82 1.00
LD 0.55 0.02 1.00
CI 0.02 0.05 0.03 1.00
PP 0.04 0.03 0.13 0.02 1.00
Proc 0.01 0.05 0.08 0.59 0.60 1.00
RR 0.10 0.01 0.19 0.21 0.55 0.08 1.00
TR 0.02 0.02 0.06 0.10 0.08 0.04 0.05 1.00
RG 0.04 0.03 0.02 0.46 0.02 0.29 0.16 0.15 1.00
ETR 0.00 0.00 0.00 0.00 0.01 0.01 0.00 0.01 0.00 1.00
Age 0.02 0.02 0.02 0.01 0.07 0.08 0.11 0.04 0.01 0.00 1.00
Tang 0.12 0.00 0.22 0.04 0.05 0.01 0.16 0.02 0.03 0.00 0.09 1.00
Prot 0.15 0.07 0.17 0.07 0.12 0.12 0.12 0.13 0.05 0.01 0.07 0.06 1.00
LA 0.07 0.04 0.05 0.45 0.31 0.61 0.39 0.12 0.39 0.01 0.09 0.17 0.02 1.00
AGR 0.01 0.00 0.01 0.01 0.32 0.00 0.24 0.00 0.01 0.00 0.03 0.01 0.02 0.11 1.00
Depot 0.07 0.03 0.17 0.26 0.35 0.56 0.41 0.49 0.09 0.00 0.17 0.08 0.19 0.07 0.12 1.00
GB 0.00 0.01 0.02 0.16 0.22 0.19 0.12 0.01 0.13 0.00 0.01 0.03 0.01 0.20 0.28 0.08 1.00
Inf 0.01 0.01 0.01 0.12 0.04 0.23 0.13 0.07 0.08 0.00 0.01 0.00 0.03 0.09 0.52 0.07 0.08 1.00
BC 0.04 0.04 0.13 0.17 0.57 0.34 0.48 0.46 0.24 0.01 0.06 0.07 0.17 0.07 0.12 0.50 0.14 0.01 1.00
Note: Abbreviations are: TD = Total Debt Ratio; SD = Short-Term Debt Ratio; LD = Long-Term Debt Ratio; CI = Credit Depth of Information Index; PP = Private Property Rights; Proc = Procedures to Enforce a Contract;
RR = Recovery Rate; TR = Trust; RG = Capital Regulatory Index; ETR = Effective Tax Rate; Tang = Tangibility; Prot = Protability; LA = Log Assets; AGR = Annual Growth Rate; Depot = Deposits per GDP; GB = 10 -
Year Government Bond Yield; Inf = Ination and BC = Bank Concentration.
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15
This hyperlink no longer shows the credit depth of information index but the depth of credit information index. See footnote 12. Both have similar denitions.

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Contents lists available at ScienceDirect

Journal of Corporate Finance

Countries lending infrastructure and capital structure

2. Related literature and hypotheses

H5. SME leverage is higher in countries where there is greater trust.

3.1. Empirical model and data description

3.3. Summary statistics

4.1. Baseline estimation

Variables Mean Median Std. deviation Min Max Obs.

Total debt ratio 0.189 0.116 0.382 0.265 52.650 34,559

Austria Belgium Finland France Germany Greece Italy Portugal UK

A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138

(1) (2) (3) (4)

Random Random Random Random

Credit index 0.0164 0.0283 0.0184 0.0501

4.2. Fixed effects

4.3. Sample splits

(1) (2) (3)

Fixed Fixed Fixed

Credit index 0.0295 0.0053 0.0348

(1) (2) (3) (4) (5) (6)

Age Size Financial crisis

Variables TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio TotalDebtRatio

Credit index 0.0250 0.0362 0.0349 0.0234 0.6770 0.0463

Fig. A.1. The conceptual framework of Berger and Udell (2006).

Appendix 2. Data cleaning steps

1. The number of employees: min is 1 and max is 249.

Firms 41 237 98 491 43 17 8 2924 9 1288 158 5314

Countries Correlations of rm size Correlations of industry

Austria 0.969 0.676

A. Mc Namara et al. / Journal of Corporate Finance 43 (2017) 122138

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