Regional development and capital structure of SMEs

This article studies the influence of regional institutional environment, measured as regional development, on capital structure of small and medium-sized enterprises (SMEs). Furthermore, the standard firm-factor determinants and the business sector of the firm are also incorporated. To this end, this research analyses a sample of Spanish SMEs where all regions of Spain and are considered, and uses Partial Least Squares (PLS), a variance-based structural equation modelling (SEM) in the form of Partial Least Squares (PLS). In this respect, PLS has several clear advantages to multiple linear regression (MLR). Thanks to this innovation, we could identify how each of these factors explains the variation in the capital structure. The results show that although firm factors and the business sector explain a large proportion of the variance of capital structure of SMEs, it is important to take into account the regional institutional environment to better ascertain the level of debt of SMEs in a single country. Spain provides a suitable and unexplored laboratory for the analysis of regional differences in the financial structure of SMEs, since, on the one hand, SMEs constitute the most relevant firms in this country, and on the other hand, Spain shows regional disparities at various levels.