The Model of Capital Structure Choice Related to Variables Applied to Smes in New Zealand Before and After Financial Crisis.

Title: the model of capital structure choice related to variables applied to SMEs in New Zealand before and after financial crisis.

Purpose:

The purpose of this report is to investigate and conclude a model of capital structure choice that will influence firm value applied to SMEs in New Zealand. Indeed, I will investigate the following main issues:

1. What is main economic situation in New Zealand, especially for SMEs market?

2. What are the factors related to the company value that contribute to capital structure choice?

3. What is the standard model that can combine all of these factors together applied to the different economic situation in New Zealand?

Background:

Despite any discussion about the crisis in this period (beginning in 2007), there should be some influence to each country, including New Zealand. Although it seems that New Zealand encounter a more positive shape in the world crisis, reported by (Blessed economist, 2009), it is due to the New Zealand government adopted many measures, including declined interest rate, cut tax, and some potential influence by devaluation of NZ dollars, such as the effect on export market. However, according to OECD (2009), the global crisis has really caused the recession during 2008 and 2009, but expect to have a recovery in 2010. It is mainly represented in the slump in credit demand causing the processing of debt reduction. In short, the world crisis brought the changes in New Zealand economic situation, so companies should take a deep consideration in how to respond it.

Motivation:

As the effect caused by world crisis contained aspects of debt, asset and profitability, the capital structure theory is appropriate to analysis this relative issue. In particular for the New Zealand market, it is more available to investigate the capital structure choice in SMEs, because 97% of the company in NZ are SMEs, which is always the focus in its economy (Cited in MED, 2005). Although there is an optimal financial structure due to the study by Modigliani and Miller, it is concluded in a perfect market without transaction cost and interest is tax deductible stated by Homes et al (2003). In the real world, each firm should confront more factors that will influence the firm value. If there is a model of capital structure choice can be provided to help company make sense when encountering financial crisis, it will cause less financial distress or bankrupt.

Literature review:

Capital structure can be simply determined as the proportion of each source of financing relative to the total asset. The modern theories of capital structure begin with the study by Modigliani and Miller,