The purpose of the study is to empirically examine the factors affecting the financial mix of small and medium enterprises (SMEs) in India. It also tries to identify the capital structure theory applicable to SMEs in India. The study also makes an effort to distinguish the factors affecting the capital structure decisions of manufacturing and service SMEs. The data employed in the study is taken from the electronic database PROWESS of Centre for Monitoring Indian Economy (CMIE) for the period 2006-2013. The sample consists of 174 non financial firms. The study applies the generalised method of moments (GMM) technique, to analyse the factors affecting the capital structure decision of SMEs in India. The study examines the effect of firm’s profitability, tangibility, size, age, growth, liquidity, non-debt tax shield, cash flow ratio and return on equity on the leverage of the firm. To check the robustness of the data, leverage is defined by five different measures. The study incorporates the overall effect of firm specific variables determining the financing of SMEs in India. The empirical findings of the study have pointed out that the relationship of the independent variables studied changes with the different measures of debt. It also validates the applicability of pecking order theory for SMEs in India. The study also confirms the industry effects, thereby concluding the fact that determinants of capital structure are different for manufacturing and service industry. The research will help SME owner(s)/manager(s) identify the factors affecting the financing decisions of firms. The study will also contribute to the limited empirical literature on capital structure of SMEs in India.
