The influence of local institutional differences on the capital structure of SMEs: evidence from Italy

This paper explains both capital-structure and debt-maturity choices for SMEs in terms ofinstitutional differences at the local level, making use of regions as the unit of analysis. Specifically,the article considers local financial development and the effectiveness of the local enforcementsystem, controlling for firm-specific characteristics. The ability of the local financial market toprovide funds efficiently is of particular interest to SMEs, due to the fact that large firms cantolerate imperfections in the local financial system by moving to international, more highlyintegrated financial markets. The main findings of the analysis suggest that capital-structure anddebt-maturity choices interact as complementary factors and that corporate financial decisionsare not only the result of firm-specific or industry-specific characteristics, but are also basedon the institutional climate in which a firm operates. After controlling for heterogeneity in firmcharacteristics, leverage was found to be positively influenced by local financial development,while the enforcement system was less relevant. Conversely, debt maturity was longer inregions with high levels of law enforcement, whereas local financial development did not play arelevant role.