Capital Structure Determinants of Small and Medium Enterprises in Croatia

Most of the research about capital structure is focused towards two theories: trade off theory (TOT) and pecking order theory (POT). The idea is to explore which theory works better in certain conditions and identify the key determinants that affect the capital structure of the company. However, in different countries different determinants with opposite relation to the leverage are found to be significant. Besides, most of the previous researches are oriented on listed companies. The aim of this paper is to analyse the capital structure of small and medium enterprises in Croatia through the analysis of the fundamental determinants of the capital structure. The research was conducted on a data sample of 500 SMEs in Croatia in the period of 2005–2011. On the unbalanced panel data set a linear regression is applied. Influence of determinants on leverage is estimated by a static panel model with random effect and with fixed effect estimation. Four capital structure determinants are analysed: growth, size, profitability and tangible assets. The results of this research support the pecking order theory confirming that SMEs in Croatia are primarily financed frominternally generated funds that affect profitability, growth, tangible assets and enterprise size.