Capital Structure and Profitability: An Empirical Analysis of SMEs in the UK

Abstract

This study examines the relationship between capital structure and the profitability of non- financial SMEs in the UK for the period of 1998-2008. Using the Two Stage Least Squares,

(2SLS) the results show a significant relationship with capital structure and profitability which

is negatively related. The size of the firm appears a more important factor that determines the

profitability in SMEs in the UK. There is consistent evidence for positive size- profitability

relationship. The results of this study have shown that the capital structure of the firm has a

significant influence on the profitability of SMEs in the UK. Especially, long-term debt to total

assets ratio is negatively related with the profitability and this is an indication that SMEs are

averse to use more equity because of the fear of losing the control.