An Empirical Analysis of the Financial Structure of Small and Large Australian Manufacturing Enterprises

The small business literature frequently refers to the concept of a “finance gap” in order to explain differences in the capital structures of small and large firms. However, little evidence, if any, exists to support this “finance gap” explanation. This paper, while canvassing the finance gap literature, offers an alternative explanation —Myers’ Pecking Order Framework. This framework focuses on management funding preferences as a major factor in the capital structure of firms. In order to test the applicability of this view, a mail survey was conducted for small and large firms operating in the Metal Trades sub-sector of the Australian Manufacturing sector. The responses provided detailed information on the types of debt used by small and large firms. While recognizing the limitations of mail surveys and the restricted information permissible in such surveys, the results provide a unique opportunity to compare the capital structures of small and large firms. Overall, the results support the proposition that capital structure is influenced by Myers’ Pecking Order Framework and that differences between small and large firms may be attributed to small firms operating under a “constrained” pecking order.