Zero-leverage determinants: A study for Portuguese SMEs

Abstract

This paper contributes to the literature on capital structure by analyzing the determinants of the adoption of zero leverage by Portuguese SMEs. The aim is to assess whether financial constraints, financial flexibility, profitability, and an external shock (COVID-19) affect the likelihood of a company operating without debt. Based on a panel of data for the period 2018–2023, a dynamic probit regression model was estimated to analyze the persistence of zero debt and its main determinants. The results indicate that smaller and older companies are more likely to adopt a zero-debt policy, partially confirming the financial constraints hypothesis. Also, liquidity, tangibility, profitability, and the pandemic context do not significantly influence the adoption of that policy, indicating that other factors, such as the financial system's structure and credit barriers, may play a prominent role. One of the main results is the high persistence of zero leverage over time, suggesting that this decision is the result of a deliberate strategy. The findings of this study provide valuable insights into the financing decisions of Portuguese SMEs and present implications for managers, investors, financial institutions, and policymakers.