Content area
Full text
Firms, which are interested to set up or to expand their business use several alternative methods of financing such as using their own money, bank loans, equity, venture capital, issuing bond or all the combination of all the listed alternatives. The current trend shows that the used of equity has been emphasized in firm's growth and development. Thus, this paper tries to find out which method of financing is suitable for the firm to increase it's value. Apart from that, this paper also wants to examine whether equity financing is a new trend as a method of financing for small-medium firms. The analysis is also directed to identify the relationship between firm's characteristics and the methods of financing. Then, a model is to be developed to relate the firm's size, age, organizational form and the intended use of fund with method of financing. The findings of this paper show that: first, both older and younger firms prefer to choose debt financing; second, both small and big firms tend to use debt financing rather than equity financing; third, in terms of organizational form, both corporations and sole proprietorship firms also choose debt financing to finance their businesses; fourth, all firms use the debt financing to finance fixed assets or operating expenses. Therefore, the potential implications shows that small-medium firms prefer to choose debt financing rather than equity financing to set up and expand their businesses.
1. Introduction
How do firms and financial institutions decide how to finance investments undertaken by a firm? Some firms fund projects by issuing equity, others by borrowing from investors and/or financial institutions. This issue interests researchers and practitioners, as well as public officials whose policies influence the availability of funds and the terms on which funds are provided to firms. Since, Modigliani and Miller's (1958) seminal works demonstrating the conditions under which a firm's value is not affected by the choice between debt and equity to finance its activities (capital structure), research has focused on establishing the analytical and empirical determinants of a firm's capital structure.
Three hypotheses are offered to explain the choice of capital structure. The asymmetric information (or Myers (1984) refers to this as a "pecking order" theory) hypothesis holds that if investors are less well-informed...