Abstract

This paper explores the fundamental factors that determine the financing decisions of Italian small-medium sized companies in the service sector. I develop a descriptive model of the choice between financing instruments, assuming that a company needing new finance may issue either equity or debt; the final choice is a function of a set of explanatory variables, which have been selected according to previous theoretical studies and empirical work. The model is then estimated using Logit Analysis on a sample of 104 Italian SMEs; results show that certain specific factors which explain capital structure for listed companies are also relevant to small-medium firms. Our findings would appear to suggest that relevant theories of capital structure are not mutually exclusive when applied to Italian SMEs, and indicate that there seems to exist an optimal leverage ratio, and that the overall significant determinants of capital structure are mainly profitability, liquidity, business risk, asset composition and company-growth prospects.