Small Firm Use Of Leverage

42 Pages 10494 Words

8. Coleman, S. and R. Cohn, (1999) « Small Firm Use of Leverage : A Comparison of Men and Women-Owned Firms », Conference Proceedings, United States Association for Small Business and Entrepreneurship, San Diego, January 14-17.

Abstract

Prior research and anecdotal evidence suggests that women-owned small businesses use less debt than men. This study
uses data from a nationwide sample of small businesses to determine differences in leverage between men and
women-owned firms. Findings reveal that the primary determinants of leverage are firm size, firm age, and profitability.
There were no significant differences in the usage of debt between men and women, and gender was not a significant
predictor of financial leverage.

Introduction

Small businesses in the United States are widely recognized as a principal source of economic growth, new jobs, and
new products and services. Access to capital is a frequently cited problem, however, and sources of capital are more
limited for small firms that for large ones. Traditional capital structure theory as developed by Modigliani & Miller
(1958) holds that firms will select the mix of debt and equity that maximizes the value of the firm and minimizes its
weighted average cost of capital. This theory may not hold for small privately-held firms because it is based on the
assumption that there are no transaction costs of any kind and that investors and managers have the same information
about the firm. In fact, the cost of issuing public debt or equity is prohibitive for small firms, and informational
asymmetries abound. Thus, unlike larger, particularly publiclyheld companies, small firms typically do not have the
option of issuing stocks or bonds.

Owing to their inability to access the public debt and equity markets, small businesses tend to be heavily reliant on
commercial banks as a source of debt financing (Cole & Wolken, 199...