Title: Influence of profitability and capital structure on the value of nascent SMEs: evidence from a developing economy

Authors: Karikari Amoa-Gyarteng; Shepherd Dhliwayo

Addresses: University of Johannesburg, Cnr. Kingsway & University Roads, Auckland Park, Johannesburg, 2092, South Africa ' University of Johannesburg, Cnr. Kingsway & University Roads, Auckland Park, Johannesburg, 2092, South Africa

Abstract: The study examined how profitability and capital structure influence the value of nascent small and medium enterprises (SMEs) in Ghana. Profit is widely held as the oxygen of all businesses. Additionally, capital structure is thought in theory to impact the value of firms. Using data from 1,106 nascent SMEs registered with the Ghana Enterprises Agency, the study employed regression analysis to test its hypotheses. The results indicate that the value of nascent SMEs increases up to a certain level of debt capital but declines if there is overleveraging, as per the trade-off theory. However, only return on equity (ROE) was found to have a significant, albeit negative, effect on nascent small firm value among the three profitability dimensions used in the study. These findings offer insights into how nascent SMEs can enhance their value, mitigate the liability of newness, and transition to maturity.

Keywords: liability of newness; capital structure; profitability; firm value; nascent SMEs; developing economy; small business survival; trade-off-theory; Modigliani and Miller theory; net worth.

DOI: 10.1504/EMJM.2023.133613

EuroMed Journal of Management, 2023 Vol.5 No.3/4, pp.210 - 229

Received: 06 Jan 2023
Accepted: 24 Feb 2023
Published online: 25 Sep 2023 *

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