The Financial Structure of Private Held Belgian Firms

We examine the determinants of the debt-equity choice and the debt maturity choice for a sample of small, privately held firms in a creditor oriented environment. Our results, which are based on 4,706 firm-year observations for 1132 Belgian firms in the period 1996–2000, generally confirm the role of asymmetric information and agency costs of debt as major determinants of the financial structure of privately held firms. High growth firms and firms with less tangible assets have a lower debt ratio. We also find that more profitable firms have less debt. Firms tend to match the maturity of debt with the maturity of their assets. Growth options do not seem to influence debt maturity, which would suggest that the underinvestment problem is resolved by lowering leverage and by bank monitoring, not by reducing debt maturity. Credit risk is also an important determinant of debt maturity: firms with higher credit risk borrow more on the short term. Finally, in contrast to most studies on the financial structure of companies, we find that larger firms tend to have a higher debt ratio and a shorter debt maturity.