To EMU or not to EMU: Can TFP 'provoke' the capital structure puzzle of SMEs?

This article investigates the influence of the macroeconomic environment on corporate leverage. Using panel data of European listed SMEs, we examine the relationship between capital structure and country-level total factor productivity (TFP), GDP growth, interest rates and stock market development across firm categories (micro, small, and medium) and monetary regimes (EMU and non-EMU countries) for the period 2005–2015. By performing a dynamic panel data analysis into a vector error correction framework, along with several model specifications and robustness tests, we provide new evidence that country-level TFP is an important determinant of capital structure choice, while its impact depends on the institutional environment (inside the EMU or not). Although there are both short-run and long-run dynamic relationships between the corporate leverage and the macroeconomic factors, to EMU or not to EMU is also evident when looking at the three size categories. Overall, our results suggest that all SMEs are not the same, and the determinants of their capital structure vary across size categories. © 2020 John Wiley & Sons, Ltd.