Variables

As mentioned before, the purpose of this Dependent variables

paper is to investigate the effects of determinants of capital structure on Iran SMEs borrowing
behavior. In order to reach this purpose, the capital structure indicators will be regressed against
the debt level of SMEs as dependent variable. Moreover, according to Michaelas et al. (1999), the
financing attitude of SMEs usually varies against of the long-run and short-run finance. For
example, SMEs asset structure is more volatile in compared with their larger counterparts.
However, SMEs normally prefer to use short-term financing over long-term financing as it is less
likely for them to go bankrupt.
The dependent variable is capital structure. The proxy is financial leverage. Two measures of
financial leverage are book financial leverage and market leverage which differ in whether equity
is book value or market value. Market value is future-oriented while book value focuses on
historical performance of a firm (Loof, 2004). Loof (2004) chooses market value of leverage due to
a future perspective required when he analyses firms growth opportunities. Frank & Goyal, (2009)
prefer book value over market value of leverage since they believe market value is not reliable for
financing policies.
In my thesis, I choose book financial leverage ratio to test the hypotheses. Market value financial
leverage ratio is used to perform robustness tests. Reviewed amounts of articles regarding capital
structure, the proxies of capital structure are short term debt ratio, longterm debt ratio and
total debt ratio (Vilasuso & Minkler, 2001; Ahmad et al., 2012; Abor, 2005; Halov & Heider,
2011). Choosing an approach to interpret leverage takes advantage of paper written by Rajan and
Zingales (1995). Six different leverage measurements were analysed which are total liability/ total
assets, total debt/ total assets, total debt/ net assets, total debt/ capital, EBIT/ interest expense,
EBITDA/ interest expense. The first four measurements are related to financial leverage. The ratio
of total liability to total assets may overstate leverage due to accounts payable and untaxed
reserves included in total liability. Total debt/ total assets can be affected by level of trade credit.
Total debt/ net assets can be affected by assets held against pension liabilities that is nothing to do
with financing. The ratio of total debt to capital where capital is calculated as total debt plus
total equity was considered to be the best representation of past financial decisions (Rajan &
Zingales, 1995). Since R&D is a long term investment and the effort of R&D cant be seen in a short
term, the financial leverage is measured as long term debt over capital.
Accordingly, the proxies of dependent variable, capital structure, are book value of long term debt
ratio and market value of long term debt ratio. Book long term debt ratio is measured as the ratio
of long term debt to the sum of total debt and book value of equity.Market value of long term
debt ratio is measured as the ratio of long term debt to the sum of total debt and market value of
equity.