Firm Growth

As stated in (Kim, 2008) profitability has an inverse relationship with debt ratios based

on market value according to studies conducted in the USA and Korea. Furthermore as

highlighted in (Kim, 2008) which stated that this determinant had an inverse effect on leverage in

only two countries: Thailand and Malaysia amongst four studied Asian countries, before the

1997 financial crisis in the region, where profitability was stated as the only variable to be

significantly related to capital structure which was non industrial.

As analyzed in (Palacı´n-Sa´nchez, 2013), profitability is associated to debt in accordance

with the theory of optimal capital structure. Which means that more profitable firms are capable

of attaining higher tax savings related with debt (Palacı´n-Sa´nchez, 2013). However, empirical

evidence states an inverse relation between profitability and the debt ratio in SMEs as it was

observed that the profitability rate of Portuguese SMEs were negative during the period that was

examined. Lastly, examining (Psillaki, 2009) it was observed that profitability was not positively

related to leverage for France, Greece, and Italy but it was not significant for Portugal in terms of

statistics.

Firm size and age

Firms which are larger in size tend to have diversified portfolios and a steady cash flow,

so their chances of defaulting is very less. Furthermore, taking into consideration the pecking

order theory, large firms adopt equity to debt implying a lower leverage. To prove this empirical

studies conducted in the USA have shown an explicit relationship between firm size and leverage

which supports the trade-off theory (Chang, 2014).

 Moreover, as illustrated by (Bas, 2009) firm size is considered an inverse mediary for the

probability of underlying default costs meaning that larger firms can lower costs at the time of

bankruptcy resulting in the size of the firm indicating a positive effect on leverage. Thus, small

firms are proposed to have lower debt and large firms have greater debt. Other than this age is

also considered a significant determinant as highlighted by (Bhaduri, 2002) as young firms are

inclined to face the problem of irregular information and they are expected to escape the equity

market and instead depend on debt factors. In developing countries, small and young firms

consider debt inexpensive since they may have easy access to credit under the industrial policies

implemented in these countries as examined in (Nejad, 2015).