Debt policy and performance of SMEs

Abstract

Purpose – The purpose of this research is to examine the effect of debt policy (capital structure) on the financial performance of small and medium-sized enterprises (SMEs) in Ghana and South Africa. Previous studies, especially on large firms, have shown that capital structure affects firm performance. Though the issue has been widely studied, largely missing from this body of literature is the focus on SMEs. Design/methodology/approach – Panel data analysis is used to investigate the relations between measures of capital structure and financial performance. Findings – Using various measures of performance, the results of this study indicate that capital structure influences financial performance, although not exclusively. By and large, the results indicate that capital structure, especially long-term and total debt ratios, negatively affect performance of SMEs. This suggests that agency issues may lead to SMEs pursuing very high debt policy, thus resulting in lower performance. Originality/value – The main value of this paper is the analysis of the effect of debt policy on the performance of SMEs in Ghana and South Africa.