This paper analyses the role that institutional factors play in explaining differences in the capital structure
of small and medium-sized enterprises (SMEs) across regions belonging to a single country. Specifically,
it studies the effect of the development of the financial sector and of the economic situation on leverage
of firms. Furthermore, the standard firm-factor determinants of debt, such as firm size, asset structure,
profitability, growth, business risk and age are also incorporated. For this empirical study, we use a
sample of 638 SMEs representing every Spanish region for the period 1999-2007, and apply the panel
data methodology. Our results suggest that the capital structure depends on the regional financial sector
and the regional economic situation which implies that institutional factors at regional level help to better
explain financing decisions of SMEs
