JORDAN'S ENTERPRISE STOCK PROFILE

Jordan's Enterprise Stock Profile

Jordan's Enterprise Stock Profile

Introduction

The purpose of this paper is to analyze the extent to which growth determines the capital structure of small and medium-sized enterprises (SMEs). This is done by considering some theories of capital structure in relation to SMEs of Jordan and then testing the resulting ideas empirically. This, in turn involves recognizing the likely determinants of SME capital structure, in supplement to growth, in order to assess the relative contribution of growth. Also, since it has been argued that the determinants of capital structure vary in certain circumstances, the relative contribution of growth is assessed for SMEs in distinct industries, for SMEs that have access to the capital market, or not, and for distinct size classifications namely micro, small and medium-sized SMEs. A key feature of the empirical studies described in this paper is that they utilize the identical database of SMEs. The data were analyzed utilizing ordinary least squares regression. The results display that growth is not consistently a major determinant of SME's capital structure but is more important in some circumstances than others (Myers, 2005, PP: 150).

Discussion

Determinants of SME's Capital Structure

Capital structure of Jordan has proved to be a perennial puzzle in finance. The original propositions emphasized the significant issues involved in financial structure conclusions namely: the cheaper cost of debt compared to equity; the increase in risk and in the cost of equity as debt increases; and the benefit of the tax deductibility of debt. They argued that, in the absence of taxes, the cost of capital remained constant as the benefits of utilizing cheaper debt were exactly offset by the increase in the cost of equity due to increased risk. With taxes and the deductibility of interest charges they concluded that firms should use as much debt as possible. This described the compromise “static trade-off” theory in which firms would use a good deal of debt to take advantage of tax deductibility but not too much to bypass the increasing likelihood of costly bankruptcy. In practice there is considerable variety in the use of debt. This is especially apparent for SMEs of Jordan, with survey results showing that numerous SMEs manage not use any debt and very few use any external equity or long-term debt. A response to this has been that this reflects shortcomings on the part of SME owner-managers on the demand side and, or, deficiencies on the part of financial institutions and capital markets (the “finance gap”) on the supply side. In recent years there have been attempts to provide explanations, of a positive rather than normative nature, of SME financing utilizing agency theory (Myers, 2006, PP: 191).

The determinants of capital structure were particularly considered. The pecking order theory (POT) as proposed by Myers (1984), provided more explanations as to what determines firms' capital structures and was built on the work of Jensen and Meckling (1976) on agency theory, of Myers and Majluf (1984) on information asymmetry, and of Ross (1977) on signaling ...