Independent thesis Advanced level (professional degree), 20 credits / 30 HE credits
Debt and financial leverage have for long been a well debated topic in managerial finance since the revolutionizing theories developed by Modigliani & Miller. Researchers have for many consecutive years reviewed the relationship between the choices of financing and its impact on financial performance. However, many of the theories developed have gained critique due to their limited applicability to small- and medium-sized enterprises, since they often neglect market imperfections. More specifically, small- and medium-sized enterprises (SMEs) have fewer available sources of funds compared to larger corporations, making existing traditional theories of capital structure inadequate. They thus have to turn to more alternative sources of funding, namely trade credit. This implies the possibility of a reverse causation where capital structure may be a byproduct of financial performance for SMEs.
This field is not sufficiently researched yet, in particular with regards to the Swedish market. Hence, the goal of this degree project is to fill an existing research gap that concerns the impact of financial performance on the usage of trade credit for SMEs based in Sweden. Empirical evidence about SMEs financing decisions forms the basis for answering the research question, which asks: How does the financial performance of SMEs in Sweden affect their usage of trade credit?
For this purpose, the investigation builds upon a five-year time frame (2010-2015) where approximately 19 910 Swedish SMES comprise the scrutinized sample population. Certain criteria have been defined in order to establish the population, allowing the authors to maneuver this degree project accordingly.
In order to examine the relationship between financial performance and its effect on the usage of trade credit, different financial performance indicators are considered and statistically analyzed through a multiple regression model. Additionally, other determinants of capital structure are utilized as control variables to reinforce the explanatory power. Based on 115 091 observations, the majority of outcomes reveal a negative relationship between Swedish SMEs financial performance and their usage of trade credit. Nevertheless, positive relationships are observed with regards to return on equity, long-term debt-to-equity and size. Essentially, the study is able to answer the given research question and demonstrate that financial performance affects SMEs’ usage of trade credit. Additionally, the findings demonstrate that traditional capital structure theories poorly explain small-and medium-sized enterprises financing decisions. Conclusions are of great benefit for SMEs’ managers in search of optimal capital structure.
2016. , 138 p.