Firm size, which the model measures as the logarithm of total assets, represents
either the largeness or smallness of the firm. The larger the firm, the lower the probability
of default, which in turn is related to greater diversification, availability of
collateral, or commercial success. Its expected effect on the probability of obtaining
credit is positive. Smaller firms, on the other hand, may find it relatively more costly
to resolve information asymmetries with lenders, and thus may present lower debt
ratios. Smaller enterprises have greater problems with bank credit than do larger
firms because the success rate for large firms applying for bank loans, for instance,
is higher than that of smaller firms (Aryeetey et al. 1994). Firm size is predicted
to be related positively to the bank-debt ratio of SMEs. Diamond (1991) and Ooi
(2000), however, find in the case of large firms that the size of the firm is related
negatively to the bank-debt ratio.
Asset tangibility is operationalized as the tangible fixed assets of the firm divided
by the firm’s total assets. The ratio of tangible fixed assets to total assets is seen
by Cassar and Holmes (2003) as an appropriate measure of asset structure and
collateral value. It is suggested that SMEs’ access to bank financing, especially
long-term loans, depends upon whether the lending can be secured by tangible assets
(Ang et al. 1995; August et al. 1997; Berger and Udell 1995, 1998; Boot et al.
1991; Storey 1994). SMEs that invest heavily in tangible fixed assets tend to have higher bank-debt ratios, as tangible fixed assets can be used as collateral, reducing
the bank’s potential losses for a given interest rate and discouraging moral-hazard
behavior. It is therefore hypothesized that there is a positive relation between asset
tangibility and bank-debt ratio.
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