Starting from the seminal paper by Modigliani and Miller [1,2], the financial behaviour of firms represents one of the most debated topics in the economic-business literature [3-10].

However, the different models proposed by scholars are not always able to reliably explain the financial behaviour of firms. This circumstance can be explained by the fact that companies differ in decision-making and operational terms. Among these, the size of the firm can represent a relevant element in influencing financial choices [5,9,11-16].

Consequently, some theories and empirical models proposed for large enterprises cannot always be applied to SMEs [9,17-20]. Furthermore, the sector to which they belong can also affect the financial behaviour of companies [19,21-24]. Most of the literature has tried to validate the different theories focusing mainly on the economically more developed countries [6,23,25]. The reason is probably related to the greater availability of data. Much less widespread are the studies on the financial behaviour of firms in developing countries [15,16,24,26]. In the context briefly outlined, this paper investigates the financial behaviour of Chilean manufacturing SMEs. We have chosen this research topic for several reasons. First, studies of this emerging economy are quite rare. Consequently, delving into this theme will enrich the literature by providing further empirical evidence on the financial behaviour of firms operating in an emerging economy.

Secondly, we have chosen to study SMEs because these companies represent the engine of the country's economy. In emerging economies, financial markets are less developed, and therefore the main source of financing for these companies is represented by the banking system [21,27]. This circumstance affects SMEs even more, determining a further point of weakness that adds to the structural and functional fragility that often characterizes these companies [21,28,29].

Therefore, financial decisions assume fundamental importance to favour the survival and development of these enterprises and reduce the risks of financial difficulties [8,27,28,30].

Consequently, the results of this research can also support entrepreneurs in making financing choices appropriate to the characteristics of their business.

We selected a sample of manufacturing companies using a stratified random sampling technique based on an economic criterion to develop the analysis. This approach made it possible to improve the estimates' efficiency and include in the sample of SMEs with different characteristics in terms of turnover, the number of employees, invested capital, and size.

The balance sheet data were collected through a questionnaire and refer to a 3-year period from 2016 to 2018. Overall, 96 manufacturing companies participated in the survey. To test the research hypotheses, we used a static, fixed effects (FE) statistical model, also performing the robustness check.

The paper is organized as follows. The second section analyzes the reference literature and illustrates the research hypotheses. The fourth section discusses the methodology and the next section analyzes the results. The last section develops the concluding remarks.   

Literature Review and Research Hypoteses

Over the last few decades, many scholars have focused on the issue of the financial behaviour of firms, favouring the development of various theories that have been verified on firms in different economies [3,32]. Excluding a complete examination of the different theories developed by the literature, in this study, we focus our attention on the trade-off and the pecking order, as they are more adequate to explain the financial decisions of SMEs in the context of an emerging economy.

The first theory of the trade-off is essentially based on the fiscal benefits of debt, on the costs of bankruptcy and agency costs [32,33] assuming that there is optimal financial leverage that can be obtained by adequately balancing these variables.

The second theory of the pecking order assumes that companies finance themselves following a hierarchical order, excluding the possibility of reaching an optimal level of leverage. In this perspective, companies prefer to use internal resources first, then debts and, lastly, the new capital. The theories just mentioned have been the subject of numerous studies that have used different determinants to investigate the financial decisions of companies. In line with the prevailing literature, in this study, we use the most significant determinants, namely size, profitability, asset tangibility and growth [5,19,34,35]. The research hypotheses for each determinant of firms' financial behaviour are developed below.

Size

Both theories support a positive relationship between size and debt, albeit with different motivations. In this perspective, the larger size facilitates access to credit at more advantageous costs, reduces the information asymmetry and the risk of financial difficulties [36].

Therefore, in line with the two theories, we hypothesize the following:

• H1: Size has a positive relationship with debt

Profitability

The two theories have different positions on this determinant. In particular, the trade-off theory suggests that the most profitable firms borrow more to benefit from the tax advantages associated with debt [36]. In this perspective, the relationship between profitability and debt is positive.

Conversely, the Pecking Order Theory suggests that the most profitable companies use retained earnings to finance their investments. Consequently, this theory assumes a negative relationship between profitability and debt [11,13,34,35].

We agree with the latter theory; therefore, our research hypothesis is as follows:

• H2: profitability is negatively correlated with debt

Assets Tangibility

According to both theories, there is a positive relationship between the tangibility of assets and leverage [21,22,24].

Therefore, our research hypothesis is as follows:

• H3: Assets tangibility has a positive relationship with debt

Growth

On this aspect, the theories present opposing positions. In particular, the trade-off theory predicts a negative relationship between growth and financial leverage [36].

Conversely, hierarchical order theory suggests a positive relationship between growth and leverage (Gaud et al., 2005; Dang & Garrett, 2015).

In line with the latter theory, we hypothesized the following relationship:

• H4: Growth has a negative relationship to debt

This paper studies the financial leverage of SMEs in an emerging economy, analyzing the relationship between the main drivers and debt.

We selected a sample of companies following a stratified sampling technique based on an economic criterion to analyse the aforementioned relationship. This approach allowed us to include within the sample companies that are sufficiently different in terms of turnover, the number of employees and invested capital [21,24].

We used a questionnaire to collect all the necessary balance sheet data. The period analyzed is three years and runs from 2016 to 2018. The questionnaire was sent to 200 companies, but not all companies agreed to participate in the questionnaire within the deadline set for the closure of the research. Overall, 96 companies participated in the survey. The analysis took into consideration the previously mentioned variables. These variables were calculated as shown in Table 1.

Table 1: Variables

To test the research hypotheses, we used a static, fixed effects (FE) model, using the following regression model:

Where LEV is the financial leverage of firm i in year t, and the determinants are represented by size (SIZE), profitability (PROF), asset tangibility (TANG) and growth, while ε represents the stochastic error. Table 2 summarizes the results of the analysis.

The observations of the correlation analysis did not reveal multicollinearity problems. Furthermore, we performed several tests suggested by the literature to verify the absence of heteroskedasticity and autocorrelation.

Table 2: Descriptive Statistics

*, ** and *** show significance at 10%, 5% and 1%, respectively

Table 3 highlights the regression results, suggesting that all independent variables considered influence financial behaviour in a statistically significant way.

Table 3: Panel Fixed Effects Regression

*, ** and *** show significance at 10%, 5% and 1%, respectively

Size positively and significantly influences debt, so our first research hypothesis is confirmed.

Profitability negatively affects debt, so our second research hypothesis is confirmed, which was in line with the pecking order theory.

Asset tangibility has a positive relationship with debt, so our third research hypothesis, in line with both theories, is also confirmed.

This result deserves some further reflection. In fact, material assets as collateral play a crucial role in emerging economies, as creditors' protection tends to be lower than in more developed economies.

Finally, growth negatively affects debt, but the results are not statistically significant.

The robustness analysis confirms our results, as shown below in Table 4.

Table 4: Robustness Check 

*, ** and *** show significance at 10%, 5% and 1%, respectively

This paper studies the relationship between leverage and its main determinants, focusing on Chilean SMEs. Among the different theories suggested by the literature, we used the trade-off theory and the pecking order theory to study the aforementioned relationship. Such theories are better suited to explain the financial behaviour of SMEs.

The companies analyzed were selected using a stratified sampling technique based on an economic criterion. This approach allowed us to include companies with different characteristics in terms of turnover, number of employees and invested capital in the sample. We analyzed 96 companies over a three-year period, which runs from 2016 to 2018.

The research hypotheses were tested with a static, fixed effects (FE) model and robustness control tests were also developed. The size and tangibility of the assets highlighted a positive and significant influence on debt. Profitability showed a significant negative influence on leverage.

These results, therefore, confirm our first three research hypotheses (H1; H2 and H3). Conversely, growth has shown a statistically insignificant influence on debt, so our fourth research hypothesis must be rejected.

The results of this paper contribute to the literature on the financial behaviour of firms, providing empirical evidence on an emerging economy that is still little studied. Furthermore, empirical findings can help SME entrepreneurs in their financial structure choices.

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