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HOW DOES CAPITAL STRUCTURE AFFECTON PROFITABILITY OF SME's

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  • Martina Harc

    (Croatian Academy of Sciences and Arts, Institute for Scientific and Art Research Work in Osijek)

Abstract

This paper aims to determine how does profitability affects capital structure of Croatian small and medium size companies. Most of previous studies have shown an inverse relationship between profitability and leverage, but also the positive correlation is claimed by some authors.. A survey has been conducted on a sample of 500 Croatian small and medium size companies for the period 2005. to 2010. The data used for the empirical analysis were derived from companies' annual reports. Pearson correlation coefficient is applied in order to examine the relationship between profitability and leverage measures. The results of this research indicate negative relationship between profitability and leverage. But, profitability differently affect short-term and long-term leverage. The relationship between profitability and short-term leverage is negative and statistically significant in all observed years. The relationship between profitability and long-term leverage is not negative in all observed years and is not statistically significant. These results suggests that Croatian SME's use profits to reduce their debt level or becoming less levered when they are profitable. This finding is consistent with the packing order theory which argues that firms prefer internal financing from external.

Suggested Citation

  • Martina Harc, 2014. "HOW DOES CAPITAL STRUCTURE AFFECTON PROFITABILITY OF SME's," Economy of eastern Croatia yesterday, today, tommorow, Josip Juraj Strossmayer University of Osijek, Faculty of Economics, Croatia, vol. 3, pages 291-299.
    • Handle: RePEc:osi:eecytt:v:3:y:2014:p:291-299
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