THE CAPITAL STRUCTURE DYNAMICS OF SMES IN KOSOVO: EVIDENCE USING PANEL DATA

Abstract

This paper evaluates the applicability of capital structure theories in assessing the financial choices made by SMEs in Kosovo. Additionally, it examines whether previously studied determinants of capital structure, such as firm age and size, liquidity, profitability, firm growth, asset structure, effective tax rate, and non-debt tax shield, can explain the capital structure choices of SMEs in Kosovo. Utilizing annual firm-level data, a panel data methodology is employed to test empirical hypotheses on a sample of 90 SMEs in Kosovo from 2013 to 2018. Dynamic panel model findings reveal that the financial behavior of Kosovo’s SMEs is influenced not only by internally generated funds but also by various specific firm characteristics, including liquidity, effective tax rate, non-debt tax shield, size, asset structure and growth. Finding aligns with the pecking order theory, which suggests that more profitable SMEs tend to rely less on debt financing. The study offers implications and recommendations for both firms’ managers and policymakers.