Countries lending infrastructure and capital structure determination: The case of European SMEs

We test in a European context the impact of countries' lending infrastructure on SMEs (small and medium sized enterprises) capital structure. Devised from Berger and Udell (2006), this infrastructure is comprised of the information, legal, judicial, bankruptcy, social, tax and regulatory environments. We find that SME debt is higher in countries with more efficient bankruptcy environments in terms of debt recovery and in countries with less stringent regulatory environments by way of lower capital regulatory requirements for banks. Components of the lending infrastructure are found to differ with debt maturity. Long-term debt is synonymous with efficient bankruptcy environments, whilst the information and legal environments matter more for short-term debt. The regulatory environment is important for both long-term and short-term debt. Our results also lend support for the Pecking-Order, Trade-Off and Agency theories of capital structure.