An evaluation of current capital structure decisions of Turkish SMEs

Findings of this study suggest that Turkish SMEs happen to experience obstacles in raising finance to improve and develop their business environment. In particular, as information asymmetry and uncertain economic environment are the key barriers, financial constraints turn out to be main handicap for SMEs’ survival. Despite its own merits, SME owners, in family business case, are reluctant to take external finance for their projects with the intention not to lose their independence and control.  The main purposes of this study are firstly to investigate the issue of financing of SMEs in Turkey in the theoretical context and secondly to make policy suggestions for the future.  Miller and Modigliani  (1958)’s basic capital structure theory, Myers, (1984)’s trade off theory, and Myers and Majluf (1984)’s the pecking order theory are the key standing theories to examine SMEs’ capital structure needs. The results of this study are similar to those reported for most Western economies that owners of SMEs follow a pecking order theory and prefer retained profit to external finance in order to cover their financing gaps.