NEWSRELEASE
For Release: May 22, 2008
Contact: Kathy Tobias, 202) 205-6938
SBA Number: 08-13 ADVO
Press Kit
Borrowing Costs Predominate In The Debt Choices
Of Small Privately Held Firms
Tax Calculations Figure Less In Small Firm Capital Structure Decisions
WASHINGTON, D.C. – The capital structure decision—a fundamental issue faced by financial managers—is, simply put, how a firm finances its assets through some combination of debt and equity. Numerous studies have tested two theories of capital structure, focusing on publicly traded firms. A new Office of Advocacy study addresses the question whether—and which—theories address the capital structure of small privately held firms.
“We welcome this opportunity to showcase research that helps us understand more fully how small businesses choose to obtain capital,” said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. “The findings can be helpful for financial institutions attempting to serve small firms.”
The research offers new evidence of the degree of leverage or debt used by privately held companies and how it differs from that used by small publicly traded firms. It finds that small firm capital structure decisions are more likely to conform to the “pecking order” theory, which says that firms opt first for internally generated funds, then for debt, and only as a last resort, for equity. In contrast, the “trade-off” theory suggests that a firm’s capital structure is more related to weighing the tax benefits of deductible interest against the costs of financial distress.
Chief Economist Moutray released the report May 22 as part of an economic research forum at the Massachusetts SBA District Office Small Business Week awards presentation, cosponsored with Cape Business magazine in Hyannis, Massachusetts
.Rebel A. Cole authored the study, What Do We Know About the Capital Structure of Privately Held Firms? Evidence from the Surveys of Small Business Finance, with funding from the Office of Advocacy. The study used survey data collected by the Federal Reserve Board.
The Office of Advocacy, the “small business watchdog” of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats, and it funds research into small business issues.
For more information and a copy of the report, visit the Office of Advocacy web site at
www.sba.gov/advo.###
The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policy makers. For more information, visit
www.sba.gov/advo, or call (202) 205-6533.