The Capital Structure of Small and Medium Sized Firms in the Former East Germany (GDR) and West Germany (FDR)

Abstract

This study examines the determinants of capital structure of small and medium sized firms (SMEs) in the former East Germany (German Democratic Republic) and West Germany (German Federal Republic) in the light of the post-unification era. A key feature of this study centres on the historical nature of Germany and the unique facet which differentiates it from other countries; but its main distinguishing features lie in the divergence of its two regions. The objective of this study was to establish whether the unparalleled circumstances faced by SMEs in East and West Germany within the post-unification era induced a difference between these two regions. Data required for the study was derived from the CDB (Creditrefirm-Bilanz-Datenbank) and used to test hypotheses on the effects of financial variables including liquidity, net debtors and stock level, on the capital structure of East and West German SMEs. A multiple regression model was developed and run to measure the effect of these variables on total, short-term and long-term debt. The results indicated that even though East German SMEs had higher asset structures and higher tax shields, in comparison to their Western counterparts, they were less liquid, less profitable, were smaller in size and had lower net debtor values. The study recommends the use of a variable which incorporates a measure for the finance gap in order to arrive at a clearer depiction of the unique facet which differentiates Germany from other countries.