Small Firm Use Of Leverage

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sing the COMPUTSTAT database Titman & Wessels (1988) and
Dwyer & Lynn (1989) found that small firms use significantly more debt, particularly short-term debt, than large firms.
They concluded that small firms rely more heavily on bank financing to avoid the relatively high transaction costs
associated with publicly issued debt and equity. Their findings are confirmed in a subsequent studies by Carter & Van
Auken (1990), Osteryoung et al. (1992), and Van Auken et al. (1995).

For many privately-held small businesses, the decision to finance with debt rather than equity may be driven at least as
much by necessity as by choice, because small firms do not have the same access to capital that larger public firms do.
They are unable to issue publicly-held debt or equity because of their small size and the high cost of issuing securities.
As a result, small firms tend to be heavily reliant on debt in the form of bank financing and trade credit (Scherr et al.,
1993; Petersen & Rajan, 1994; Cole & Wolken, 1995, Ibid., 1996).

Although prior ...