The SME’s Capital Structure in Taiwan: The Effect of the Global Financial Crisis of 2007

Dennis B. K. Hwang¹, Gary S. Robson², Teng-Shih Wang³, Jyh-Shan Lan⁴
(1. Bloomsburg University; Providence University (visiting), USA; 2. Bloomsburg University, USA;
3. Fengchia University, Taiwan; 4. Providence University, Taiwan)

Abstract: The capital structure choice is one of the most important decisions faced by corporate management (Degryse, 2010). This study explores the impact of the 2007 global financial crisis on the capital structure for Taiwanese small and medium enterprises (SMEs). The study finds that the financial crisis imposes significant impacts on the SMEs managers’ financial decisions and hence on firms’ capital structure. Firm size, growth opportunity, and tax shields exert different effects on SMEs’ capital structure before and after the crisis. The study also finds that bankruptcy cost (operationalized by firm size), tangibility of assets, growth opportunity, and profitability always are important factors impacting SME managers’ capital decisions. Generally, the SMEs in Taiwan rely more on the short-term debt than long-term debt in financing their assets and operations. The findings are useful to governments and monetary authorities when they formulate regulations and policies. Less restrictive regulations, preferential tax rates, and higher availability of funds to the SMEs should become effective measures for rescuing the SMES from the financial crisis.

Key words: capital structure; firm characteristics; pecking order theory; trade-off theory

JEL code: G15