Investment decisions and small and medium-sized enterprise indebtedness: Heckman’s two-stage approach

Purpose Insufficient internal financing capacities and challenges to accessing external finance are crucial to small and medium-sized enterprises (SMEs) investment and growth. This study aims to investigate how SME leverage of bank financing is related to the investment decision. Design/methodology/approach Using Heckman’s two-step econometric modelling to correct for sample selection bias, this study investigates the effect of entrepreneur characteristics, firm characteristics and performance on firms’ capital structure choices conditional on new investment decisions. Findings The main results reveal that larger firms with growth aspirations tend to make new investments. In the second stage equation, empirical results demonstrate that among SMEs who made a new investment, those SMEs with highly educated owner/managers, on average, use more external financing (i.e. banks loan) rather than internal funds – also, the smaller the company, the less bank leverage. Compared to the limited liability legal form, SMEs registered as individual businesses have less bank financial leverage. These results confirm that internal capacities for funding new investments are limited, and hence small firms must rely on external finance. Originality/value This study provides a unique empirical investigation and evidence based on a sample of SMEs in Kosovo. To the best of the authors’ knowledge, this study is the first attempt to empirically analyse investment behaviour in relation to capital structure for SMEs in Kosovo and one of the few, in general, to consider the sample selection bias issues underpinning the other studies in this field. The analysis corrects for sample selection bias, using growth aspiration as an instrumental variable.