Overcoming the liability of newness: The interplay of debt, equity, and profitability in nascent SMEs

Small and medium-sized enterprises (SMEs) in their early stages face the liability of newness that can undermine their survival. This study investigates the impact of strategic financing decisions and profitability on the solvency of 1,106 Ghanaian SMEs during their first 5 years. Leveraging the pecking order theory, the study examines how internal equity and debt, in conjunction with net profit after tax, as well as returns on equity and assets, influences the liability of newness. Regression analysis highlights a positive association between equity financing and return on equity with solvency, while return on assets shows no significant relationship. The study emphasizes the importance of internal equity in mitigating the liability of newness. Considering this study’s findings regarding the significance of equity ratio, debt-to-equity ratio, return on equity, and net profit after tax in mitigating the liability of newness, SME owners are advised to take specific measures to boost these metrics.