CROSS-INDUSTRY DIFFERENCES IN FINANCING BEHAVIOUR OF SMEs FROM AUSTRALIA’S BUSINESS LONGITUDINAL SURVEY

The principal objective in this paper is to ascertain the extent to which industry appears to influence the financing behaviour of several thousand SMEs distributed across eleven industries, using data taken from the Australian federal government’s Business Longitudinal Survey for four financial years from 1994-95 to 1997-98. The research reported in the paper provide substantial empirical evidence that cross-industry differences in financing behaviour do exist even after controlling for other relevant influences on SME financing choices such as enterprise size, business age, profitability, growth, asset structure and risk. The key finding is that industry does not simply proxy for one or more of these other factors, but is an important influence in its own right. Introduction The scholarly literature concerned with the financing behaviour of business concerns, including that of small and medium-sized enterprises (SMEs), has for some time shown interest in the influence industry may have upon funding choices. In the simplest terms, it has been conjectured that firms within a particular industry tend to adopt a similar financing pattern that essentially represents a consensus on what is appropriate given prevailing circumstances in the industry. Holmes et al. (2003, p. 112) have recently summarised extant knowledge on this matter, with emphasis on SMEs, as follows: Industry as an explanatory variable is supported by the equilibrium theory of capital structure which suggests ‘the economic sector a company belongs to can be an important factor . . . when explaining . . . financial behaviour’ (Lopez-Garcia & Aybar-Arias 2000, p. 57). Sectors with strong tangible asset holdings are expected to have higher average debt levels than is evident in sectors associated with intangible or risky assets. However there has been controversy and debate concerning the association between industry and debt structure (Jordan, Lowe & Taylor 1998, p. 3). This debate has ranged from comments suggesting differences across industries but consistency within industries (Harris and Raviv, 1991), to claims that industry is not as important as firm-specific aspects (Balakrishnan & Fox 1993). Jordan, Lowe and Taylor (1998) support this latter view, while Cassar and Holmes (2001), Hall, Hutchinson and Michaelas (2000), Lopez-Gracia (sic) and Aybar-Arias (2000), Romano, Tanewski and Smyrnios (2001), Michaelas, Chittenden and Poutziouris (1999) and Bennett and Donnelly (1993) find some support for an association. Apart from highlighting that the issue of whether industry influences financing behaviour is, as yet, unsettled, this quotation raises the possibility that industry is simply a proxy for one or more firm-specific characteristics that are the real underlying determinants of funding choices (Van Auken and Neely, 1996;