Capital structure determinants of small and medium enterprises in Mogadishu, Somalia

A B S T R A C T

The aim of this study is to examine the factors influencing the capitalstructure of small and medium enterprises (SMEs) in Mogadishu, Somalia.The study applies the trade-off theory, which posits that severalcharacteristics affect how firms finance themselves. According to this theory,firm size, which serves as a proxy for bankruptcy costs, positively influences
capital structure—larger firms face lower bankruptcy risks. The researchemployed a descriptive correlation research design and utilized a stratifiedrandom sampling technique to gather data through questionnaires. Data analysis was conducted using the Statistical Package for Social Sciences (SPSS version 20). The study identifies three independent variables—profitability, cultural factors, and firm size—as crucial indicators of capital structure for SMEs in Mogadishu. These factors are pivotal as SMEs expand and initiate new operations. Interestingly, the perceptions or beliefs of owner-managers
have little impact on capital structure decisions, while network linkages do not significantly influence SMEs' capital structure. It underscores the responsibility of SME owners and management to ensure their financial structures are optimally managed. The study highlights profitability as a significant factor affecting capital structure. In the absence of profits or
insufficient profitability, businesses may struggle to survive as investors seek returns that ensure capital growth over time. Profitability thus plays a critical role in the long-term sustainability of a company.
Keywords:
Capital structure Small and medium-sized enterprises
Trade-off theory
Profitability
Firm size