The Determinants Of Financial Leverage Of SMEs In Mauritius

Abstract

The key aim of this paper is to test the relevance of the different financing theories for explaining capital structure choice in the Small and Medium Enterprises (SMEs) sector in Mauritius. One of the areas of financial theory that has worried much of academicians and professionals is debt policy decisions in firms due to the limited study in this field. Three of the most relevant theories of capital structure are explored, namely the Trade Off Theory, the Agency Theory and the Pecking Order Theory (POH). Hence, in order to shed more light over this issue, an empirical analysis has been carried out over a panel data sample of 25 firms of SMEs for the period 2002-2008, using quantitative analysis. The panel data methodology is used to test empirical hypotheses and controls for firm heteroskecedasticity and corrects for autocorrelation among the variables that are involved. The findings show that some theories are not in line as such with the results obtained from the analysis as the POH. However, some of the Capital Structure Theories are considered important in determining financial leverage of SMEs in Mauritius like agency costs involved, information asymmetry problems, liquidity and cash flow problems. The main implication of this study is to understand the position of SME in Mauritius in terms of their debt and its importance and contribution to the National Income.