Determinants of capital structure of SMES in Monrovia, Liberia

Abstract

This study investigated capital structure of SMEs in Monrovia, Liberia. SMEs finance themselves either by equity or debt. Literature on capital structure follows two main strands: the pecking order theory and MM model. In addition, debt market is prone to information asymmetry. The importance of this study comes from the basis that previous studies have focused on economies that have the sophistication of capital market(s). Researchers have not focused on economies that have no capital market(s). This study is particular important and somehow different in that Liberia is yet to establish a capital market (security exchange or stock exchange). Resource mobilization in Liberia rests mainly on banks and microfinance institutions. There is not an organized way by which resources are captured from the public through the sales of stocks or other securities. This study is different in that it was done on a non-capital market economy. This study used multistage stratified random sampling technique to select SMEs that were interviewed to ensure that samples are representative of various parts of Monrovia. The research divided Monrovia into four zones. Each of the zones has fifteen (15) respondents. This was achieved by using random sampling technique in order to minimize the sampling bias. The study was done on three years including 2009, 2010 and 2011. Regression Analysis was used to explain the data. Leverage (debt) is the dependent variable and independent variables are profitability, growth, asset structure, size and age. The study endeavored to establish the impact of profitability, growth, asset structure, size and age on leverage (same as debt). The study found that profitability, asset structure and age determine capital structure but Size and growth do not influence capital structure. Profitability was found to have a negative relationship with leverage which supports the pecking order theory. Asset structure and age were found to have positive relationship-this positive relationship explains the concept of information asymmetry.