This paper focuses on the leverage behaviour of small firms in Mauritius, as these firms, although comprising the large majority of firms worldwide, have often been sidelined in the literature. The basic premise of this study is based on the observation that only a limited number of firms make use of debt while the majority, have no leverage, that is, no debt in their capital structure.
The probit methodology is used in this study to investigate factors associated with positive amounts of debt based on the characteristics of the firms. The data used is survey data on small firms for three specific time periods namely the years 2007, 2013 and 2018.
The results show that firm location and number of employees have a significant impact on the decision of firms to undertake leverage while firm age and firm performance have varying levels of significance over the years on the leverage decision. The findings reveal that the awareness of support schemes for small businesses also has a positive impact on firm leverage decisions. The results suggest that the zero leverage phenomenon in the context of Mauritius can be better explained by financial constraints rather than debt conservatism.
This study is a contribution to the literature as it studies “small” businesses that are very different from the “small” firms in advanced economies and operate in a different set-up. The study also adds new insights to the zero-leverage phenomenon.
