Do local financial and legal systems affect SMEs capital structure?

This note investigates the role of institutional differences at the local level as determinants of firm's capital structure. Specifically, its aim is to empirically assess whether and to what extent SMEs' financial decisions are affected by local financial development - evaluating this influence both ceteris paribus, and by allowing it to be conditional on different levels of legal enforcement inefficiency. Controlling for debt inertia, firms' heterogeneity and endogeneity problems, we find that local financial development may be an important determinant of SMEs' capital structure, and that firms' appear to have better access to financial debt in areas characterized by a higher quality of legal system. Thus, despite the international process of capital markets integration, local financial institutions do not seem to become irrelevant for SMEs, which are in need of well developed institutions at local level to gain easier access to external financial resources.