Regional Financial Sector and Capital Structure Decisions in a Dualistic Economy

This study analyzes the extent to which small firms’ capital structure decisions may be affected by cross-regional variations in the structure of the banking market, as well as cross-regional variation in economic growth and firm characterstics. Such factors are likely to be significant in countries (a) where banks represent the most important source of external finance for firms, (b) with a high proportion of small and medium-sized firms, and (c) with significant contrasts in regional economic development. This work contributes to the empirical literature on small firms leverage by adopting a more fine-grained geographical focus—i.e. the county level rather than the regional one. Using a large panel dataset of Italian small and medium sized firms over a 14-year period (2002-2012), we compare the results of our analysis on the total sample with those on the subsample of Southern Italian firms. Our findings seem to show that in Italy, mainstream financial institutions are scantly able to provide affordable credit facilities to small firms. In addition, in less economically advanced regions, the structure of local banking system could mitigate this problem. Indeed, our findings show the positive role played by local cooperative banks, especially in Southern regions, in improving the ability of small firms to access to external finance.