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1. Introduction
Small and medium-sized firms (SMEs) face information asymmetry and agency problems that unfavourably affect their access to long-term debt (Berger and Udell, 1998; Coleman, 2006). Short-term loans allow creditors to monitor borrowers, allowing small firms to access short-term credit with more favourable terms. Accordingly, those firms may heavily depend on short-term debt, reducing the ability to fund fixed assets with long-term sources of finance (Flannery, 1986; Berger and Udell, 1998; Custódio et al., 2013; Ryan et al., 2014; Keasey et al., 2015; Cathcart et al., 2020). Moreover, Cathcart et al. (2020) conclude that financial leverage has a higher effect on the likelihood of default of SMEs than on large firms. In accordance with those authors, this difference is explained by the higher dependence of SMEs on short-term debt, which implies greater refinancing risk. In turn, Jun and Jen (2003) conclude that firms with assets robust enough to absorb the refinancing risk should use more short-term loans to reduce interest costs.
On average, European SMEs have a low level of long-term leverage but a high level of short-term leverage (La Rocca et al., 2011; Keasey et al., 2015; OECD, 2019). SMEs that cannot accomplish the contracts with creditors will face a high rollover risk, not being able to renew the short-term debt loans, at least on favourable terms (He and Wei, 2012; Brunnermeier and Oehmke, 2013; Legesse and Guo, 2020). Accordingly, those firms need to adjust their short-term debt ratio towards the target ratio. The speed of adjustment depends on the firm's balance between adjustment/transaction costs and deviation/distress costs (Banerjee et al., 2004; Gaud et al., 2005; Drobetz and Wanzenried, 2006; Flannery and Rangan, 2006; Frank and Goyal, 2009; Faulkender et al., 2012).
Most previous research works on this specific topic have focussed on the target total debt ratio in the context of listed firms. Moreover, previous studies (Purnanandam, 2008; Konstantaras and Siriopoulos, 2011; Mselmi et al., 2017; Quintiliani, 2017), analysing the speed of adjustment (SoA) towards the target, in the context of SMEs, did not research if there is a relationship between the level of financial distress risk and the SoA towards the target short-term debt ratio.
To fulfil this gap, this paper...