Capital Structure Decisions of French Very Small Businesses

Very small businesses (VSB) experience financing constraints unlike those encountered by larger companies; however, they are rarely studied. Their unique characteristics, including the important information asymmetry they suffer and the predominant role of their shareholder-manager, may be well suited to a pecking order theory framework as a means to analyze their capital structure decisions. Specifically, VSB financing choices appear to follow a hierarchical order, such that they prefer internal to external financing and debt to stock issuance. Using a sample of 393,662 firm-year observations from 56,605 individual French VSB, this study shows that the pecking order theory can explain most of their financing decisions. In addition, a change in debt relates asymmetrically to financing deficit. Firms with a positive deficit rely almost entirely on debt for financing, whereas firms with a negative deficit (excess of financing) behave more conservatively and are less likely to repay their debts spontaneously in advance.