Size and Determinants of Capital Structure in the Greek Manufacturing Sector

Increasing competition in the European Union (EU) and world markets affects the Greek manufacturing sector. Capital structure is essential for the survival, growth and performance of a firm. There has been a growing interest worldwide in identifying the factors associated with debt leverage. However, nothing has been done so far in contrasting small and medium sized enterprises (SMEs) and large sized enterprises (LSEs) on these aspects. SMEs are very important in the Greek manufacturing sector for employment and growth. Empirical studies show that capital structure and the factors affecting it vary with firm size. In this paper we investigate the determinants of capital structure of Greek manufacturing firms and formulate some policy implications that may improve the financial performance of the sector. Our study utilizes panel data of two random samples, one for SMEs and another for LSEs. The findings show that profitability is a major determinant of capital structure for both size groups. However, efficient assets management and assets growth are found essential for the debt structure of LSEs as opposed to efficiency of current assets, size, sales growth and high fixed assets, which were found to affect substantially the credibility of SMEs. In an era of increasing globalization, the findings imply that Greek SMEs should focus their efforts on (a) increasing their cash flow capacity through better assets management and achievement of higher exports and (b) ensuring good bank relations, but at the same time, turn to alternative forms of financing. Greek LSEs should adopt strategies that will lead to the improvement of their competitiveness and securing new forms of financing. Government policy measures aiming at structural changes and economic efficiency should be designed clearly depending upon its targets: SMEs need policies that will encourage information exchange and co-operation in local and foreign markets and use of e-business, as well as, financial assistance. On the other hand, LSEs should be supported by policies aimed at new high-technology investments, entrance of new firms and foreign investments in the country, tax alleviation and increase of R&D and training expenditures. The upgrading and transparency of the capital market in Greece is expected to improve the capital structure of Greek manufacturing firms.