Title

• Why Do Small Businesses Take On High Levels of External Loans?: A Censored Quantile Regression Analysis

Document Type

Article

Publication Date

9-2012

Publication Source

Academy of Accounting and Financial Studies Journal (AAFSJ)

Volume

16

Issue

SI

Inclusive pages

17-34

ISBN/ISSN

1096-3685

Peer Reviewed

yes

Abstract

A limited number of studies examine capital structure decisions by closely-held small businesses. They utilize the methodologies that assume a constant relation between debt usage and explanatory variables throughout the conditional distribution of the dependent variable. Different than these prior studies, we assess debt decisions of small businesses with high levels of external loans by using Censored Quantile Regression (CQR), which requires no assumptions of the conditional distribution. Furthermore, our study analyzes the 1993 National Survey of Small Business Finances (NSSBF) to focus on a time period that resembles small businesses' debt usage and economic conditions before the recent economic collapse. There is no evidence that the tax advantage of debt has a significant impact on the loan decisions of small businesses with high levels of external loans. When examining other capital structure factors identified in prior studies, we find that only the industry target leverage consistently affects loan decisions of these small businesses, regardless of their organizational forms. Specifically, debt usage of flow-through entities (Sole Proprietorships, Partnerships, and S-Corporations) is significantly influenced by profitability and firm age while debt usage of C-Corporations is significantly influenced by firm liquidity and owner characteristics. These findings provide a further understanding of small businesses' debt decisions in an overleveraging environment and hopefully help improve their ability to survive. Keywords: small businesses; external loans; censored quantile regression.

Keywords

censored quantile regression, external loans, small businesses

Disciplines

Accounting | Corporate Finance

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