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relationship between firm tangibility and limited liability. Firm tangibility refers to the amount of tangible assets that a firm possesses -this is the ratio of physical assets to the total assets of the firm. Limited liability refers to the liability of a firm's owners for no more than the capital they have invested in the firm. An interesting finding had to do with the relation between firms and banks or other financial institutions. The study found that a firm's leverage is an increasing function of both the number of banks and the number of financial institutions with which the firm has business relationships. Another interesting finding was in relation to female business owners- they used less leverage than their male counterparts.
Degryse, de Goeij and Kappert (2010) conducted a study whose objective was to find out about the impact of industry and firm characteristics on the capital structure of Dutch small and medium enterprises. The results revealed that a firm's characteristics such as age and size had an impact on the finance structure of a firm. These results were in line with the pecking order theory predictions as small businesses used their profits to reduce their levels of debt since they preferred internal funds over external funds. Industry characteristics (such as competition) also had an effect on the capital structure decision and this was in line with the trade-off theory because industries exhibited different debt levels.
There has been several studies conducted on small business capital structures with each of the studies being applied to different regions or different sectors of a country's economy, the general trend in the findings of these studies was that size, age and profitability of the firm affected capital structure decisions. In te1ms of the capital structure theories, the pecking order model appeared dominant in terms of the manner in which the firms chose their finance sources for all the studies. Most of them did not consider the behavioural aspect that might influence these decisions.
A study conducted which briefly explored the topic of behavioural factors was that of Hamilton and Fox (1998). The objective of this research was to find out the financing preferences of small business owners in New Zealand. The research revealed that small business owners had a set of preferences over funding sources which were independent of age or size of the firm; and had little to do with the consequent financial structures of their balance sheets. Internal funding sources commencing with the cash savings of the founders and then extending to retained earnings were the most preferred since these hindered the independence of the owner the least. The main reason for preferring internal equity to external equity was the need for constant control or ownership of the business. This research was shifting to behavioural finance but it did not delve too deeply into the main psychological aspects regarding these finance preferences.
Similarly Zellweger, Frey and Halter (2009) found that family managers were more loss averse for the independence goal than for the return on investment goal. This means that a comparable loss in independence and return leads to differing changes in the value that the entrepreneur feels; the loss for independence is experienced more intensely than the loss in the return goal. In this study it was shown that family managers were willing to reject investments in profitable projects if it was going to affect their independence goal. The family managers also made decisions based on reference points- they were willing to incur investments with higher control risk (measured in terms of debt levels) if they could act starting from a safe starting position (one characterized by high equity levels). The concept of reference points can also be related to the behavioural finance heuristic of anchoring whereby people form an estimate by beginning with an initial number and adjusting it to reflect new information (Shefrin, 2007: 9). In terms of the family managers they were only willing to bear additional control risk when they could revert to a secure independent initial position. On the contrary, non-family managers displayed higher loss aversion for the return goal and made decisions independently of reference points. This can be explained by the agency relationship since managers have a duty to maximise shareholder value.
FACTORS AFFECTING CAPITAL STRUCTURE DECISIONS: A SMALL BUSINESS PERSPECTIVE 181