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Capital Structure of Growing Small Firms: a 12Country Study On Becoming Bankable
Abstract
Rein Peterson is Magna International Professor of Entrepreneurial Studies, York University, Toronto, Canada, and is currently on sabbatical leave as a senior research fellow at the National Centre for Management Research and Development at the University of Western Ontario, Canada. Joel Shulman is Assistant Professor of Finance at Babson College, Massachusetts, USA. In this paper they examine financing problems reported in 4,400 interviews conducted in 12 countries-six developed and six developing. The data was originally collected for the 1984 International Small Business Congress in Amsterdam by SKIM Industries Market Research of Rotterdam, Netherlands. The results of the study indicate that a 'finance gap' may indeed exist among many firms in the less developed countries and in fact may be quite severe. The gap seems to exist, albeit to a lesser extent, among young/small firms in developed countries. It seems apparent that while asymmetric information and agency cost theories help describe part of the results, firms in less economically developed countries also suffer from other more fundamental problems.
... Because financial structure and debt opportunities are very important for MSMS firms, there is some debate in the literature over the extent to which leverage levels vary with the size of firm. International comparative studies by Remmers et al. (1974) and Peterson and Schulman (1987) reached different conclusions. The first of these studies found the debt/ total assets ratio to be independent of firm size. ...
... Initial funding sources have been the subject of international research and are a useful focus in part because firm age has yet become a variable capable of influencing this decision (Hamilton and Fox, 1998). Peterson and Schulman (1987) provided a general model relating the financial structure of the small firm to its age (or size). Financial markets are not sufficient and do not provide adequate financial opportunities for new firms. ...
... Especially, increase of the number of financial institutions in Turkey increase their involvement to new firms. Peterson and Schulman (1987) argue that as time passes, firms become more attractive to lenders, i.e., debt levels will raise causing ownership ratios to fall. Our investigation of financial structure in MSMS firms in forest products industry confirmed this theory. ...
Most theoretical and empirical studies of capital structure focus on large corporations. Only a limited number of studies on capital structure have been conducted on micro, small and medium size enterprises (MSMS), and this deficiency is particularly evident in investigations into factors that influence funding decisions of family business owners. The study aims to explore the capital structure and financing preferences of MSMS firms owners and focuses more narrowly on the debt vs. equity preferences revealed in the initial and ongoing financing of MSMS firms in forest products industry. In this study, financial preferences of MSMS firm owners in forest products industry were investigated in 18 cities across the Black Sea Region in Turkey. Some of the financial characteristics and capital structure of these sectors were identified on the basis of a sample survey of 851 firms. The preliminary results that emerged from the study illustrate that owners of MSMS firms preferred internal financial sources against too high cost capital from external market in initial and ongoing facilities of firms.
... Em consequência, a gestão do topo das PME prefere financiar as necessidades das empresas com fundos gerados internamente em vez do recurso a investidores externos. De facto vários estudos (Dimson, 1978; Peterson e Shulman, 1987; Hunsdiek, 1985; Auken e Carter, 1989; Gray et al., 1996; Petersen e Rajan, 1994; Berger e Udell, 1998) mostram que as fontes internas de capital são fundamentais para o financiamento das PME. Esta estratégia reduz a incerteza relativa ao acesso a capital e minimiza o risco de perda de controlo e flexibilidade da tomada de decisão. ...
... Noutros estudos (Dimson, 1978; Jones, 1979; Peterson e Shulman, 1987; Auken e Carter, 1989; IAPMEI, 1995b; Landström e Winborg, 1995; Binks e Ennew, 1997; AIP, 1997; Berger e Udell, 1998; Lund e Wright, 1999) concluiu-se que a principal fonte de capital alheio das PME eram os bancos. As medidas governamentais implementadas, para proporcionarem às PME as garantias necessárias no acesso ao crédito bancário, podem ter um efeito positivo na importância que os bancos assumem como fontes de capital destas empresas. ...
Recent entrepreneurship research has moved away from perfect capital market assumptions about firm's financing decisions toward recognition of the role of individuals and their interactions in investment decisions. The Small and Medium-Sized Enterpr ises (SMEs) owners' preferences for capital sources may provide a useful basis for understanding the financing practices of small firms. This paper aims to understand the influence of SMEs' owners and/or managers on firms' financing decisions. A questionna ire was mailed to Portuguese SMEs at 1998. The data obtained was submitted to univariate and bivariate statistical analyses. The results show that the majority of SMEs are managed by their owners. SMEs with financial needs have a higher level of indebtness that is justified by firms' owners and/or managers wish to maintain unchanged the firm's capital ownership. The results conjointly show that SMEs owners' preferences for capital sources influence the firm's financing decisions.
... The entrepreneurs' social network up to some extent may help them to overcome these challenges (Raijman & Tienda, 2000). For example, entrepreneurs can use their social contacts for obtaining easy credit and financing facilities (Peterson & Shulman, 1987). In certain economies, obtaining licenses and meeting other legal formalities are difficult, which an entrepreneur can overcome with the social contacts developed through social networking (Djankov et al., 2002). ...
Entrepreneurs are the backbone for economic development and employment generation. Entrepreneurs use social networking extensively for developing social contacts and acquiring financial, managerial, and technical resources. UAE after the real estate bust has made deliberate efforts to make the country a hub for entrepreneurs and foreign investment. This study has examined the effect of human resources, moral support and global presence on social networking and the effect of social networking on generated ideas and business operations. Moreover, the study has also examined the mediating role of social networking on generated ideas and business operations. The questionnaire for the study was adapted from earlier studies. The sample size for the study was 193 entrepreneurs of UAE. Smart PLS 3 was used for data analysis. We have developed five direct and six indirect hypotheses. The findings are consistent with earlier studies. We found that human resource, global presence, and moral support effect social networking. Also, social networking indirectly affects idea generation and business operations. Implications for managers were drawn from the results that may help entrepreneurs to be more efficient and effective in their business ventures.
... There are quite a number of previous studies supporting the applicability of the life-cycle model in explaining the financing decisions of SMEs (e.g. Petersen and Schuman, 1987;Fluck, Holtz-Eakin, and Rosen, 1998;Mac an Bhaird and Lucey, 2006). Berger and Udell (1998) use data from several US datasets to explain how firm financing changes over time. ...
... Earlier research has denoted that banking sector is the major external source of capital for small and medium firms (Scherr et al., 1993); (Petersen and Rajan, 1994); (Cole and Wolken, 1995). Nevertheless, it is difficult for the small firms to acquire bank loans as compared to large firms (Binks et al., 1992;Orser et al., 1994;Peterson and Shulman, 1987). ...
This study critically reviews the existing literature corresponding to banks’ performance in SMEs sector and investigates the Bank-SMEs relationship. The issues are highlighted with theoretical background of banks’ performance from SMEs financing perspective. Further, it elaborates the financial performance of firms which theoretically supports the banks’ credit rationality. The subsequent sections explain each determinant of SME firms by identifying the theories that individually elucidate firm-specific variables i.e., firms’ performance, financial need, capital structure and growth of banks. Additionally, it explores the association between SMEs loan requirements, length of relationship, product/services and banks’ performance. Moreover, the current study appraises some earlier researches which have examined the direct and indirect relationships among industry specific variables and firm-bank performance. Based on existing information, the final section articulates the gaps identified in literature to summarize the findings and areas for future researches.
... Earlier research has denoted that banking sector is the major external source of capital for small and medium firms (Scherr et al., 1993); (Petersen and Rajan, 1994); (Cole and Wolken, 1995). Nevertheless, it is difficult for the small firms to acquire bank loans as compared to large firms (Binks et al., 1992;Orser et al., 1994;Peterson and Shulman, 1987). ...
This study critically reviews the existing literature corresponding to banks’ performance in SMEs sector and investigates the Bank-SMEs relationship. The issues are highlighted with theoretical background of banks’ performance from SMEs financing perspective. Further, it elaborates the financial performance of firms which theoretically supports the banks’ credit rationality. The subsequent sections explain each determinant of SME firms by identifying the theories that individually elucidate firm-specific variables i.e., firms’ performance, financial need, capital structure and growth of banks. Additionally, it explores the association between SMEs loan requirements, length of relationship, product/services and banks’ performance. Moreover, the current study appraises some earlier researches which have examined the direct and indirect relationships among industry specific variables and firm-bank performance. Based on existing information, the final section articulates the gaps identified in literature to summarize the findings and areas for future researches.
... For example, family firms often have unsound financial records, asset security, and equity base, making it difficult for them difficult to obtain external finance in the venturing process. Under such circumstance, family members, guided by altruistic belief, may bring in personal equity (Peterson & Shulman, 1987) or family loans, therefore easing the firm from financial anemia (Berger & Udell, 1998;Romano, Tanewski, & Smyrnios, 2000). Moreover, if the firm is short of human resources in the venturing, family members who have not formally engaged in the firm may join in without claiming any financial compensation, therefore mitigating the business from the resource shortage pressure and salary payment burden. ...
p>Entrepreneurship has been observed to work among couples who have mutual understanding and trust. It has also been observed to have more advantages in terms of the synergy that can bring about achieving more, one’s business been in safe hands and building marital fidelity. Nevertheless, it has also been conceived by some individuals that joint business among couples can lead to instability and arguments that arise from financial matters of the business. There are several studies in marriage and family business, effect of family on entrepreneurship, fashion marketing environment, fashion marketing strategies, fashion communication etc and none focuses on family fashion business in Nigerian socio-cultural and fashion marketing environment. Therefore, this study focuses on the attitudes of married couples and marriageable singles in establishing joint clothing and textile business. A total of 30 graduate students of Clothing and Textiles were purposefully selected for the study because they are trained to acquire vocational and entrepreneurial skills to be job creators (not job seekers), employers of labour and maintaining balance family life. Result shows that the respondents have favorable attitude to entrepreneurial skills, business management, home management, financial issues, risk management, cultural values and personality with mean scores of 3.48 , 3.21 , 3.13 , 3.09 , 3.53 , 3.75 and 2.60 respectively. The overall attitudinal score is 3.26 indicating a favorable response that couples and marriageable singles can establish joint fashion business.
Therefore this study recommends that couples who intend to own joint businesses should have mutual understanding, trust and communicate more about financial matters before they own a joint business. They should discover an appropriate way of handling the business with maturity and proper organization so as to avoid conflicts.</p
... The few studies that have addressed the financing and capital structure of SMEs are mostly for developed countries (Hughes, 1997;Watson & Wilson, 2002;Zoppa & McMahon, 2002;Hussain & Matlay, 2007); only a few address developing countries (Peterson & Shulman, 1987;Aidis, 2005;Abor, 2005;Bhaird & Lucey, 2011). Research into this area for small, island economies is scant, particularly research investigating the WCF of SMEs. ...
This paper investigates the approach of small-to medium-sized Mauritian manufacturing firms to working capital finance using a survey-based approach and case studies. Financing has been cited as one of the most common problems faced by SMEs and is often viewed as one of their main barriers to growth. Using parametric and non-parametric techniques, the important variables that affect the demand for financing are examined. Interestingly, it is observed that the sample firms adopted more informal sources of financing and networking to meet their financing requirements. The financing preferences of the firms were predominantly short-term and there was conclusive evidence that they were reluctant to move down the pecking order for fear of losing control of their businesses. The findings confirmed that internal resources, non-bank sources and short-term debt represent the main sources of financing. The research findings provided some new evidence in support of the different approaches to financing working capital. These SMEs used more informal sources such as shareholder loans and bootstrap finance. These results indirectly suggest that firms experience significant information costs that prevent them from gaining access to the traditional sources of financing. The findings of the study will be useful to the financial institutions that fund SMEs and to policy makers.
... Subsequent studies have emerged from a growing number of countries, including Portugal (Esperanca, Gama, & Gulamhussen, 2003), Belgium (Heyman, Deloof, & Ooghe, 2008;Manigart & Struyf, 1997), Spain (Garcia-Teruel & Martinez-Solano, 2007;Sogorb Mira, 2005), Italy (Giudici & Paleari, 2000), Sweden (Berggren, Olofsson, & Silver, 2000;Cressy and Olofsson, 1997), Taiwan (Fu, Ke, & Huang, 2002), India (Ghosh, 2007), Germany (Audretsch & Elston, 1997;Elsas & Krahnen, 1998;Fritsch, 1993), Australia (Cassar & Holmes, 2003;Fitzsimmons & Douglas, 2006), and Ireland (Mac An Bhaird & Lucey, 2010). Whilst this research has been extended to comparative international studies (Bancel & Mittoo, 2004;Daskalakis & Psillaki, 2008;Hall, Hutchinson, & Michaelas, 2004;Peterson & Schulman, 1987), there is little or no research on the influence of national culture on capital structure. Investigation of the influence of culture in the SME literature has been confined to studies on enterprise (Gray, 1998) and as a 'spur' for innovation and growth (Bradley & Kennelly, 2008). ...
Employing firm-level observations from 13 countries over a seven year period, and controlling for an extensive set of firm-level characteristics, industry effects and country-level institutional variables, we provide a conceptual framework and empirical analysis of how culture influences capital structure in small and medium sized enterprises (SMEs). Uncertainty avoidance and individuality are negatively related with long-term debt, highlighting SME owners desire to avoid heightened business risk, reduce interference from debt providers, and maintain autonomy and independence. Negative relationships between power distance and debt suggest a more consultative role with financial institutions, facilitating greater access to debt. Policy makers should take account of the powerful consequences of cultural influences when designing and implementing financing initiatives.
... We also know small firms are likely to experience credit rationing when banking institutions are unable to produce an accurate evaluation of the credit risk involved in their credit demands (see, for example, Stiglitz and Weiss 1981, Fazzari, Hubbard and Peterson 1988, Binks, Ennew and Reed 1992and Hubbard 1998). This explains why bank credit is the most important external source of funding for small firms until they grow enough as to become "big players" in their markets (see, for example, Peterson and Schulman 1987). We also disagree with the orthodox approach because we think financial liberalisation mainly benefit the more developed and competitive economies, as Dow (1998) has suggested. ...
... For example, family firms often have unsound financial records, asset security, and equity base, making it difficult for them difficult to obtain external finance in the venturing process. Under such circumstance, family members, guided by altruistic belief, may bring in personal equity (Peterson and Shulman, 1987) or family loans, therefore easing the firm from financial anaemia (Berger and Udell, 1998;Romano et al., 2000). Moreover, if the firm is short of human resources in the venturing, family members who have not formally engaged in the firm may join in without claiming any financial compensation, therefore mitigating the business from the resource shortage pressure and salary payment burden. ...
Purpose
The theme of this paper is entrepreneurial risk taking. Specifically, the paper has twofold objectives: to develop insights into individual and familial correlates of risk‐taking propensity in family firms; to explore impacts of risk taking on business performance.
Design/methodology/approach
A quantitative survey was conducted with the sampling frame outlined based on the FAME database. A total of 236 companies participated in this survey.
Findings
The results suggest that individual and familial variables will determine the risk‐taking propensity, specifically entrepreneur's industrial tenure, age, and the controlling generation in family businesses. Furthermore, risk‐taking intensity correlates with business performance.
Research limitations/implications
The cross‐sectional rather than longitudinal design of the study determines that it can only proffer a snapshot of the scenario. Further, the current study excludes non‐incorporated firms. Future explorative studies in a similar vein may be executed through channels of national and local development agencies to capture non‐incorporated firms.
Originality/value
Recent recognition of the intertwinement of family and business in family firms has led to the assumption that risk‐taking propensity in family firms is influenced by family ownership and family associated concerns. Nonetheless, rarely has the influence of family on risk‐taking propensity and the ensuing performance been addressed in the literature. The insights developed by this original exploration will broaden the knowledge landscape of family firms and entrepreneurial venturing allowing us to better understand how family firms can survive and prosper in the increasingly competitive market.
... There is some debate in the literature over the extent to which leverage levels vary with the size of firm and the reasons for this. International comparative studies by Remmers et al. (1974) and Peterson and Schulman (1987) reach different conclusions. The first of these studies found the debt/total assets ratio to be independent of firm size. ...
Small owner-managed firms typically operate with levels of debt, much of it short-term, which are higher than those found in large companies. This paper investigates the financing preferences of a cross-section of small firm owners. The findings support the view that the financing decisions of small firm owners are based on a demand-side packing order of finance types. The resulting financial structures reflect a desire to minimise intrusion into the firms and are not entirely the consequence of persistent deficiencies in the provision of finance to small firms.
... The increased availability of large panel datasets has resulted in studies in many countries, including the UK (Chittenden et al., 1996, Michaelas et al., 1999, Hall et al., 2000), US (Ou and Haynes, 2003), Spain (Sogorb Mira, 2005), Australia (Cassar and Holmes, 2003), Taiwan (Fu et al., 2002) and Portugal (Esperanca et al., 2003) to name but a few. Other studies have considered cross-country comparisons (e.g. Peterson and Schulman, 1987, Hall et al., 2004). The dependent variables in these regression models are usually short-term, long-term and total debt ratios, and there is a paucity of studies examining sources of internal and external equity as a dependent variable. ...
This paper presents an empirical examination of firm characteristic determinants of the capital structure of a sample of 299 Irish small and medium sized firms (SMEs hereafter). Hypotheses are formulated from pecking order and agency theories incorporating a financial growth life cycle approach, and are tested on a number of multivariate regression models. The results suggest that age, size, level of intangible activity, ownership structure and the provision of collateral are important determinants of the capital structure in SMEs. A generalisation of Zellner's (1962) Seemingly Unrelated Regression approach (SUR hereafter) is used to examine industry effects and to test the stability of parameter estimates across sectors. Results suggest that the influence of age, size, ownership structure and provision of collateral is constant across industry sectors, indicating the universal effect of information asymmetries. Surmounting these information asymmetries is influenced by differences in asset structure across sectors, resulting in diverse sectoral financing choices.
Cette étude a pour objet d’un part de mettre en évidence les caractéristiques de l’asymétrie d’information et du rationnement du crédit bancaire et, d’autre part, d’analyser les facteurs explicatifs du rationnement du crédit bancaire. L’étude par questionnaires auprès de 93 PME montre que celles-ci évoluent dans un contexte d’asymétrie d’information et qu’elles sont aussi rationnées. Les tests de régression logistique montrent que le caractère opaque des PME et l’incertitude liée au projet d’investissement influencent positivement sur le comportement de rationnement du crédit bancaire et que la relation bancaire de long terme entre la banque et l’entreprise, et la capacité à présenter des garanties ont une influence négative sur le comportement de rationnement du crédit bancaire.
Este trabajo, por una parte, constata la importancia de la pequeña y mediana empresa, especialmente, en la economía canaria, realizando una descripción de las características principales de la reserva para inversiones. Por otra, contextualiza los fundamentos teóricos relativos a la estructura de capital y la política de dividendos de las empresas, así como la evidencia empírica de sus factores explicativos, al ámbito de las pymes canarias. Por último, realiza un análisis de los beneficios potenciales que pueden obtener las empresas que ajustan sus ratios de endeudamiento y tasas de reparto a los target que impone el Régimen Económico y Fiscal.
Because Innovation requires the commitment of resources to a development with highly uncertain net returns, the methodology of financial economics Is useful In understanding innovation, even to the point of suggesting a relationship between the Incidence and rate of Innovation and the state of key financial factors. Our model posits such a relationship, grouping the key financial factors under the headings of investment valuation and financing: the fundamental components of financial economics. The model argues that the incidence and rate of innovation are related to both valuation and financing factors as well as the Interactions between them. We present a structure for this model and suggest a LISREL methodology for empirically testing these financial factors.
The objective of this study is to examine the impact of Small and Medium scale Enterprises (SMEs) on economic growth in Nigeria. We employed secondary data of credit to SMEs and gross domestic product for the period 1997-2007 and used Ordinary Least Square regression as method of data analysis. We found that increased credit to SMEs has a positive impact on economic growth if the credit is adequately utilized and recommends that the CBN should establish National Credit Guarantee Scheme for SMEs that will guarantee atleast 80% of credit to SMEs in Nigeria.
Among all the economic players, small enterprises (SEs), by number, dominate the whole world business segment. However, it is a very common problem for SEs, in every economy either developed or developing, to get access into formal financial sector. Working capital can be treated as the life blood for SEs to be operated. But unfortunately, most of the small enterprises face serious problem while obtaining such loan from banks. On the other hand, banks face a lot of problems to finance working capital to SEs. Therefore, this chapter intends to identify the problems faced by SEs in obtaining and by banks while financing working capital. A total of 413 small enterprises were interviewed through a structured questionnaire administrated directly by the researchers and selected purposively from the capital city (Dhaka) of Bangladesh. The major findings indicate that about 72% small enterprises got the access into banks for working capital loan although all of them face a lot of problems while obtaining such loan from banks. To identify the problems and challenges faced by banks while financing working capital to SEs, 34 commercial banks' officials working in SME department were interviewed through questionnaire and selected purposively based on their high involvement into SME sector lending. Bankers encountered different problems and challenges related to working capital financing in SEs. Based on the survey findings, a good number of solutions have been formulated for policy initiatives.
This article examines the financial constraint of 18 listed Canadian forest firms between 2000 and 2014 following the stochastic frontier approach. Empirical results support the observation that Canadian forest firms have a strong dependence of using both equity financing and debt financing as the coefficients of both equity and debt financing mean functions are significant at 1% level. The distribution of investment efficiency index (IEI) of all 18 firms demonstrates a loss of around 40% of the rate of investment due to financing constraints. Regional analysis demonstrates that the time-varying patters of IEI of three provinces are significantly different.
This study tests the effect of capital structure on the profitability of the Iraqi firms that listed in Iraq stock exchange. The study used statistical methods such as multiple regression model represented by ordinary least squares (OLS) as a technique to investigate the claimed effect of capital structure on the profitability by applying the same on four firms from the Iraqi industrial sector for the period (2004-2013). The study findings suggest that capital structure positively influence, in a significant way, on the profitability of listed firms in Iraq. Furthermore, profitability, and assets (firm-size) have been found to be negatively influencing the capital structure of the listed firms. These findings generally concur with the predictions of the pecking order theory and the signalling effects of capital structure decisions of firms. The concerned companies must have to enhance their firm size that negatively correlated with ROE, its growth and continuity.
Cette étude a pour objet d’un part de mettre en évidence les caractéristiques de l’asymétrie d’information et du rationnement du crédit bancaire et, d’autre part, d’analyser les facteurs explicatifs du rationnement du crédit bancaire.
L’étude par questionnaires auprès de 93 PME montre que celles-ci évoluent dans un contexte d’asymétrie d’information et qu’elles sont aussi rationnées. Les tests de régression logistique montrent que le caractère opaque des PME et l’incertitude liée au projet d’investissement influencent positivement sur le comportement de rationnement du crédit bancaire et que la relation bancaire de long terme entre la banque et l’entreprise, et la capacité à présenter des garanties ont une influence négative sur le comportement de rationnement du crédit bancaire.
Employing World Bank Enterprise Survey in 2005, the multinomial logit and OLS model are implied to understand the possibility of four loan statuses and similarities and differences capital structure of firms without bank loan and firms with bank loan. Testing Pecking Order Theory also gives different conclusion for each type of firms. Firms without bank loans have too high ratio of debt to total capital, therefore they mobilize capital by means of issuing equity. Investigation of the non-debt tax shield indicates that Vietnamese tax system is in favour of firms with bank loans than firms without bank loans and issuing equity. Northern Central is considered a better region for credit supply. From the findings, our study suggests that more research be focused on this area in order to have deeper understanding of the factors that facilitate bank loans which can be applied for businesses in other areas.
D’apres bon nombre d’auteurs ayant etudie les difficultes financieres des PME, il semble que celles-ci souffrent d’un probleme chronique de sous-capitalisation du a leur acces limite aux differentes sources de financement offertes en general aux grandes entreprises. Dans cette etude essentiellement descriptive, nous avons voulu examiner des PME a deux stades particuliers de leur developpement soit celui de la croissance et celui de l’acces au financement public. Les resultats indiquent que la croissance, la rentabilite et la taille semblent influer sur l’etendue de l’endettement dans le financement total ainsi que sur sa composition. On constate en plus que les PME reduisent leur endettement total au moment de l’acces a l’epargne publique, mais qu’elles l’augmentent dans les annees suivantes. Ces quelques resultats preliminaires pourraient permettre de confirmer la theorie de Myers sur l’ordre hierarchique qui semble convenir parfaitement a la specificite des PME.
Recent recognition of the intertwinement of family and business aspects in family firms has led to the perspective that family business performance should be assessed from both family and business angles. The focus of this conceptual paper is the elaboration of a performance measurement model aligned with this perspective. The proposed framework captures all quoted performance measurements within the two proposed constructs, namely leading and lagging constructs. Each construct is further dichotomised into the family and family business dimensions, mirroring the complexity of family business performance. It is anticipated that this conceptual exploration will surface debate on the uniqueness of family business performance appraisal.
This paper analyses a database of U.K. small companies in order to establish the profile of Technology Based Small Firms (TBSFs) in terms of their demography, financial structure and performance, and tax affairs. Following the evaluation of the impact of direct taxation on the high technology small companies, compared to that of their low technology counterparts, the paper briefly discusses the current policy debate about the nature and appropriateness of tax-based incentives for the development of this strategically important scale and type of enterprise.
This article focuses on innovation in small businesses. Specifically, the objectives of the paper are twofold: a) to explore the impact of individual features, business resources, organisational culture, structure and market dynamism on firm-level innovation; b) to develop insights into innovation in small and medium enterprises (SMEs). The research procedure follows Yin's (1994) case method approach. Two Information and Communication Technology (ICT) companies, winners of various innovation awards in the West Midlands of the UK, participated in the case studies. Evidence from the studies shows that innovation intensity is dependent on the availability and sufficiency of financial and human resources. Furthermore, an organisational culture supporting new product development and an innovation-conducive structure/mechanism influences the innovation outcomes. Evidence also reveals that firm-level innovation will be influenced internally by senior executives’ experiences and externally by market dynamism.
This paper explores the development of the family-business sector during the post-socialist era in the Balkans. It establishes the profile of family-business entrepreneurship in the emerging markets of southeastern Europe. By focusing on the Bulgarian and Romanian experience, we present and briefly contrast the transitional variant of family-business entrepreneurship with the contours of the Greek family business system. Next, we map out the growth patterns of Balkan family ventures, including businesses in the agro-industrial, manufacturing and other commercial sectors. We conclude with some tentative policy recommendations aimed at enhancing the further development of family-business entrepreneurship in the Balkans.
DR. FRANCIS CHITTENDEN IS SENIOR FELLOW in Business Development and Director of Business Development Programmes at Manchester Business School and Richard Bragg is a Senior Lecturer in Law and Business, University of Manchester, England. This paper is based on the analysis of the detailed accounts of 1200 small firms in the United Kingdom and 250 business (each) in Germany and France. Following the recent policy debate, at both the national and European level, the main objective of the work was to assess the impact of late payment of suppliers' invoices on the operating cash flow of small businesses in order to achieve two major objectives first, given the existence of a 'finance gap' which acts as a barrier to the growth of many small firms, to quantify the scale of the impact of potential reductions in credit terms on business cash flows; second, to determine the proportions of small companies which would benefit or suffer from faster payments made by their customers and to their suppliers. The paper concludes that for most of the small firms examined, in all three countries, reductions in the trade credit cycle would result in improved cash flows, in the short-term, and lower requirements for future investment in working capital if sales increase, in the medium-term.
Purpose
The purpose of this research is to show that while mainstream finance for small businesses has been researched, hard to reach segments of the UK owner/manager population have eluded empirically rigorous investigation. The authors investigate the financing preferences of owner/managers in small ethnic minority businesses in the UK and examine their access to both formal and informal finance as well as the use of personal funding networks. The emergent results are compared with the findings from a matched “control sample” of white small business owner/managers.
Design/methodology/approach
Identical, in‐depth, face‐to‐face interviews were used with a sample of ethnic minority small business owner/managers and a matched control sample of white respondents in the West Midlands region of the UK.
Findings
Family and close associate networks were very important for the support of both ethnic minority and white owner/managers. All the respondents required loans from banks and other financial institutions, both at the start‐up stage and in subsequent years. For the ethnic minority owner/managers, the initial importance of financial institutions declined over the years. In contrast, in the control sample, institutional borrowing needs increased considerably. Ethnic minority owner/managers showed a preference for less intrusive and more “user friendly” financing options that allow them to remain in full control of their businesses.
Practical implications
Caution is advised in the use and generalisation of results emerging from qualitative research that involves small samples of respondents chosen from a restricted area of the UK.
Originality/value
The research shows the importance of “user‐friendly” financing options for owner/managers.
The capital structure decision can be considered a difficult problem for academics as well as for managers. Corporate debt policy has been studied in the context of both large and small firms in developed countries, but comparatively less developed countries have received much less attention in the literature. This is particularly true in the case of medium income economies with an above average weight of financial intermediaries. This paper tests the factors affecting the capital structure decision of small firms in one such country. The pooled time series cross-section regression estimates for 995 firms and four years, suggests variables such as taxes, bankruptcy costs, size, collateral, age and growth opportunities affect the capital structure decisions of small firms. These findings have significant implications, both at the firm level and for the support of policies that redefine the financial infrastructure that may foster the emergence of local entrepreneurs in these economies.
The primary goal of this empirical research study is to identify key drivers of SME satisfaction related to a variety of aspects of the bank/SME relationship. The research uses data from 3,190 interviews with key informants – identified as the person who is most responsible for financial and banking decisions – in Canadian SMEs. Research focused on how SME overall satisfaction is affected by the account manager’s management of the bank/SME relationship, the branch staff’s management of the bank/SME relationship and the bank’s policies and procedures regarding bank/SME relationships. All three drivers were significantly and strongly related to SME satisfaction with the bank with which they had their primary relationship.
Purpose
– Globally, there is an increased recognition of the important role played by micro, small and medium enterprises (MSMEs) in the economic development of a country. Similarly, in the South Pacific region, MSMEs is the main engine behind the economic growth. In particular, MSMEs is one of the biggest contributors to GDP, employment and plays a core role in the supply chain of large businesses. One of the major problems faced by MSMEs in South Pacific Island countries is a lack of finance to advance business growth. Against this backdrop, the purpose of this paper will be to examine the financial obstacles faced by MSMEs.
Design/methodology/approach
– The main objective of this study is to explore the financial obstacles faced by MSMEs in the manufacturing sector of Fiji and Tonga. In particular, this research tries to evaluate the severity of the impact of each of the financial obstacles on the growth and survival of MSMEs in Fiji and Tonga.
Findings
– The research involved conducting a survey of 200 MSMEs in Fiji and Tonga. The study concluded that financial problems faced by the MSMEs could be divided into three broad categories: financing problems; operational and administrative problems; and sales and debtors problems. The 19 financial obstacles tested in this research falls under these broad categories.
Originality/value
– This research is original and highly value to a wide range of readers. Scholars, practitioners, aid donors are widely interested to understand the status of MSMEs in Fiji and Tonga. Research of this nature has never been conducted in Fiji.
This paper documents the findings from an extensive postal survey conducted in 1997-98, which looks at the tax affairs of small firms, both incorporated and unincorporated. Tax planning practices of small firms in the UK, and the implications of these practices on working capital and investment in these businesses, are considered. The results indicate that tax planning in most small firms is not very sophisticated and this has an effect on investment decisions in these businesses. As a result of poor tax planning practices small firms are not in a position to utilise fully all available tax reduction mechanisms. Instead they have to rely on mechanisms that can be decided upon after the accounting year end; unfortunately these involve the withdrawal of money from the business (eg pension schemes, salaries/bonuses). The results presented in this paper illustrate that the decision concerning the level of pension fund contributions and drawings/salaries, and subsequently the level of retained profits, will depend on both financial (business needs and market characteristics) as well as non-financial (management characteristics) factors. However, the present combination of these factors in the small business sector favours the extraction of profits out of the business rather than the reinvestment of profits that will enhance the creation of wealth and employment. Based on the beliefs and expectations of small business owner/directors a number of tax incentives are discussed that the government could introduce in order to enhance the financial development and prosperity of small firms.
Reviews and analyses the long standing concern over the
availability of finance for young and potentially growing business. The
perception of a “finance gap” has led to the creation of
financial institutions to address it, few of which now survive. Examines
the management practices of some in the UK and the USA, which have not
only survived, but also appear to be both filling “the gap”
and investing successfully. Identifies a number of resources other than
finance which these organizations have found it necessary to supply in
order to generate success among their investee businesses, and a number
of common investment management practices. Finds the issue of the
finance gap to be inseparable from issues of other resource deficiencies
within young firms. Suggests that policy makers might valuably heed the
experience of organizations which have learned, often painfully, how the
finance gap might, and might not, be filled.
There has been a trickle of recent evidence that the current recession is coming to an end. From a number of perspectives it may be argued that it is fortunate that the pace of recovery from the longest post-war recession is faltering and slow. How can slow recovery from the longest recession since the war be welcome when almost 44% of the small businesses responding to the National Westminster Bank / Small Business Research Trust surveys report low turnover or lack of business as the major constraint, with the smallest businesses being affected most? The reason is that the economic and social policy cocktail which offers the prospect of sustained growth has yet to be discovered in the UK, if indeed such policies exist. Over the past thirty years (excluding the oil shock of the early 1970s) two periods of decline in real GDP have occurred, both since 1980 (Budget Statement 1990/1). It thus appears that the downside swings in the economy are becoming more pronounced. Recent reductions in interest rates are helpful in encouraging recovery but policies which smooth rather than accentuate fluctuations in the levels of economic activity are what is really required. These policies need to be established within the context of a strategy for managing the UK economy. Such a strategy must incorporate the role of small firms which, as recent evidence shows, continue to be a very important segment of industry and commerce despite the ravages of recession.
Investigates the lending needs of the self-employed and of micro-based
businesses. Describes the lack of coherence between the evaluative
criteria used in traditional lending models and the needs of business
owners. Findings suggest that the standard “5 C” model for assessing the
viability of loan applications does not meet the needs of the present
business environment. Women business owners may be at a disadvantage
when applying for a business loan as the supposedly “objective” criteria
are applied in a “subjective” manner to the detriment of female
entrepreneurs. Presents information on the characteristics of micro-loan
programmes and proposes a market approach to micro-loan practices that
is better adapted to changing finance opportunities.
This article analyses the financial environment facing small firms in Sweden, 1960–95. The Swedish approach to small firms makes no clear distinction between the functions of non-market and market organisations or between private and public lenders. Their typical financial contracts are essentially similar: open-ended and based on commercial considerations. The long-standing commitment which is observed from both types of creditors implies a continuous exchange of information, carried in the form of regional business networks. The two types of organisations share risks in the financing of new projects, and the role of bank credit as a signal when applying for public credit reinforces the perception of a business network in which private and public organisations collaborate. This stresses the importance of analysing venture capitalists as an entity rather than as isolated actors. A triad relationship between firms, public and private lenders distinguishes the Swedish case. The mixture of state-based and market-based finance has a long tradition related to the Swedish model of a mixed economy.
This paper reviews the nature of the equity gap facing new and growing ventures in the UK, and assesses the contribution of both demand-related and supply-related explanations of this gap. The use of informal equity investment (sources of risk capital other than professionally managed venture funds, institutional investors and public equity markets), represents one possible resolution of the new-venture equity gap. From a preliminary analysis of the UK situation, we conclude that informal sources of equity are used by a significant proportion of those small ventures in the UK which have sought external equity funding at some stage. On the basis of case-study analysis of the experience of one informal investment network the paper concludes with an assessment of some of the processes underlying the supply of and demand for informal risk capital in the UK and identifies an agenda for further research.
Using panel data models, this study investigates whether firm's age is a determinant of Portuguese SMEs' financing decisions. The results suggest that age is relevant for: the impact of financial deficit on variations of short- and long-term debt; the level of adjustment of short- and long-term debt toward the respective optimal levels; and the relationships between usual determinants and short- and long-term debt. The results for young and old SMEs suggest that Trade-Off Theory and Pecking Order Theory should not be considered to be mutually exclusive, since both theories are necessary to understand the SMEs' capital structure decisions throughout their life-cycle.
Stages of Growth models were the most frequent theoretical approach to understanding entrepreneurial business growth from 1962 to 2006; they built on the growth imperative and developmental models of that time. However, our analysis of the universe of such models (N=104) published in the management literature shows neither a consensus on basic constructs nor any empirical confirmations of stages theory. We show that with a change in the basic assumption and two propositions of the stages approach, a "dynamic states" model of organizational growth and change can be derived that has far greater explanatory power than its precursor.
ABSTRACT While the existence of a difference in capital structure between,small and,large firms has become
Entrepreneurship has been studied from numerous perspectives, most notably psychology, management, and marketing. Few studies, however, have utilized finance theory and methodology. Several finance based theories are explored as possible models for studying entrepreneurship, categorized as valuation and capital structure. Valuation theories and applications include such approaches as portfolio theory, capital asset pricing, efficient markets, and option pricing. The primary concepts of valuation theory are examined -- e.g., emphases on risk/return and time value of money -- as are the potential problems associated with the use of valuation theory. A second proposed approach is capital structure theory, which considers each of the following factors: leverage, taxes, and bankruptcy; agency costs; and information asymmetries. Potential limitations and implications of utilizing capital structure theory to examine entrepreneurial success are discussed, including the influence of factors like venture capital and the early stage growth/liquidity crisis. The implementation of chaos theory in studying entrepreneurship may also offer a different, valuable perspective. Overlapping areas of study for finance and entrepreneurship are identified as areas of opportunity for future research. (AKP)
Suggests a four-dimension theoretical framework for studying entrepreneurship at the startup stage, consisting of (1) the starter and the new venture as the core of the system, (2) the external environment, (3) the dynamics of the process, and (4) managerial behavior. A three-step model to transition from past to future studies of entrepreneurship is also presented, consisting of an analytical approach (examining the interaction between the starter and external environment, the primary approach previously), policy approach (suggestions for the future), and adjustment pattern (comparison of actual and optimal start-up situations, the latter not yet devised). Twelve suggestions are then formulated for the future study of entrepreneurship, divided into the categories of what researchers should do, what starters should do, what supporting infrastructure should do, and what public authorities should do. A synthesis of concepts central to new venture entrepreneurship within the literature is also given, from which the new framework should advance. (CJC)
Does entrepreneurial optimism affect the financing decisions? Do financiers have better knowledge of entrepreneurs’ unrealistic optimism and curtail lending to them? Using a large sample of U.S. small businesses and a new measure of optimism, we find that more optimistic entrepreneurs tend to use more short-term debt. We do not find evidence that banks curtail lending to more optimistic entrepreneurs. In fact, banks are more likely to approve loan applications by optimistic entrepreneurs, they do not charge an interest premium, and do not require more collateral. Our results are robust to alternative measures of optimism, alternative samples, and controls for private information.
Most previous studies of this topic have followed a methodology of selecting a sample of women business owners, and then questioning them on their experience with their own business(es). Although financing frequently is noted as a major problem, previous studies suffer from the absence of a “control” group—a corresponding group of male business owners with whom to compare experiences. Furthermore, previous studies have tended to ask the respondent if she believes that she was treated any differently because she was a woman, a leading question which could potentially bias the conclusions.
Relationships between somatic growth (length and weight) and two indirect measures of growth (otolith growth, RNA/DNA ratio) were assessed for red drum (Sciaenops ocellatus) under different feeding rations [0%, 2.5%, 5%, 10%, 15%, and 20% body weight (BW)/day] for 30 days. Representative samples from each ration level were taken in 10-day intervals between Day 0 and Day 30 for evaluation of direct and indirect growth measures. Positive correlations were observed between ration levels, somatic growth, and otolith growth. Statistical differences in weight and length of red drum were observed among ration levels by Days 10 and 20, respectively. Statistical differences for measures of otolith growth among ration levels were evident by Days 20 and 30. In addition, RNA/DNA ratios showed clear separation between fish that were starved and fish that were fed but demonstrated minimal separation among ration levels. Overall, the combination of a measure of somatic growth (weight) and a measure of otolith growth (otolith weight) resulted in the most statistical separation among ration levels. Findings from this study suggest that somatic growth, otolith growth and RNA/DNA ratios are suitable measures of relative growth of red drum; however, due to differences in sensitivity, caution must be exercised when using indirect growth (otolith growth, RNA/DNA ratios) measures to estimate recent growth.
The popular media have been inundated with stories of the spectacular success of start-up companies whose very existence, let alone their meteoric growth, would not have been possible without the infusion of venture capital. By comparison, there is a dearth of scientific research on the topic of venture capital. In this article we take a systematic look at entrepreneurs in search of risk capital. This inquiry is based upon five data bases including surveys of venture capitalists and entrepreneurs. We have tracked 193 ventures which were denied venture capital, surveyed 179 new high-technology companies in Northern California, and reviewed the Dun & Bradstreet credit reports of 145 new ventures in California in SIC codes related to the high tech sector with follow-up interviews of 86 of these 145 start-ups.
This article examines the problems of managing a rapid-growth firm. We contend that instead of being a time for entrepreneurial celebration and relief, a period of over-50% growth is a time for wariness and some very difficult decisions. Such firms face a fragile transition: they are beyond being intimate, cohesive entrepreneurial ventures but they have not yet become secure, stable entities. Not only are they in flux, but these firms are often disoriented by the pace at which change is occurring. Firms such as Atari, Cray Research. Cullinet, Osborne Computers, People Express, and Rolm recently have faced (or now face) these challenges with very different degrees of success.
This article reports on the nature of strategic activities and concerns reported by the CEOs of 77 entrepreneurial manufacturing firms once initial success in their marketplace had been achieved. Once the entrepreneurial firm achieves initial market success, the rate and number of strategic decisions faced by the entrepreneurs rapidly expand. A product becomes a product line. Product lines are added. Facilities and equipment are expanded. Personnel are added. A more formal and interpersonally complex organization becomes necessary. Markets and distribution channels expand, adding uncertainty to key market-related decisions. New financial risks arise, often as the result of undercapitalized cash flows. All of these factors combine to dramatically increase the pressure on the entrepreneur's strategic decision making.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
In this paper, a model of corporate leverage choice is formulated in which corporate and differential personal taxes exist and supply side adjustments by firms enter into the determination of equilibrium relative prices of debt and equity. The presence of corporate tax shield substitutes for debt such as accounting depreciation, depletion allowances, and investment tax credits is shown to imply a market equilibrium in which each firm has a unique interior optimum leverage decision (with or without leverage-related costs). The optimal leverage model yields a number of interesting predictions regarding cross-sectional and time-series properties of firms' capital structures. Extant evidence bearing on these predictions is examined.
In this study of a relatively small number of corporate executives with line experience in corporate venturing, some clues are uncovered that could help those corporations contemplating the initiation of acquisition, joint venturing, or corporate start-up activities to avoid or overcome the obstacles that our sample of managers encountered.The preliminary indications are; 1.1. Joint ventures appear to be a highly useful way of starting off in venturing activity while at the same time reducing the initial risk.2.2. The excutives in this sample indicated that experience at venturing resulted in improvement in venturing performance, but only after several venture attempts. From this observation, two suggestions appear reasonable: 1) Start venturing with few relatively small ventures and keep ventures relatively small until experience is gained. Start perhaps with joint ventures to learn your way in and “graduate” to grass-roots start ups once significant learning has taken place; and 2) The experience gained will reside in people who may have been part of an unsuccessful venture, perhaps several unsuccessful ventures. If this experience is to be useful, the people who have gained it need to be retained and recycled to other new ventures.3.3. Although some of the obstacles perceived by the executives diminish with experience, others do not. Regardless of experience, inability to plan for new ventures is a recurrently cited obstacle, as is the inability of the corporation to provide adequate support to the venture.The last point may be the most significant observation in this study. Prevailing corporate values call for the ability to plan and to meet the plan as one of the primary measures of managerial competence. New ventures, however, rarely conform to plan, especially the quantitative projections. As a result, corporate support either dwindles when plans are not achieved or desperate spending efforts are made to achiev unachievable planned results, which often results in large losses. Very different planning methods are needed for ventures, methods that, in the highly uncertain surroundings of venturing activity, address what realistic corporate expectations should be, how progress should be measured and venture managers evaluated, and in what ways and at what times support will be provided by the parent corporation. These are discussed in the main body of the article.
Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.
Lawrence R. Klein pioneered the work on aggregation, in particular in production functions, in the 1940s. He paved the way for researchers to establish the conditions under which a series of micro production functions can be aggregated so as to yield an aggregate production function. This work is fundamental in order to establish the legitimacy of theoretical (neoclassical) growth models and empirical work in this area (e.g., growth accounting exercises, econometric estimation of aggregate production functions). This is because these models depend on the assumption that the technology of an economy can be represented by an aggregate production function, i.e., that the aggregate production function exists. However, without proper aggregation one cannot interpret the properties an aggregate production function. The aggregation literature showed that the conditions under which micro production functions can be aggregated so as to yield an aggregate production function are so stringent that it is difficult to believe that actual economies can satisfy them. These results question the legitimacy of growth models and their policy implications. Scientifi c work cannot proceed as if production functions existed. For this reason, the profession should pause before continuing to do theoretical and applied work with no sound foundations and dedicate some time to studying other approaches to estimating the impact of economic policies in order to understand what questions can legitimately be posed to the empirical aggregate data. Lawrence R. Klein fue uno de los pioneros del campo de la agregaci�n, en particular en el �rea de las funciones de producci�n, durante la d�cada de los 40. Sus contribuciones ayudaron a defi nir el problema de la agregaci�n para que investigadores posteriores establecieran formalmente las condiciones formales bajo las que funciones de producci�n microecon�micas con propiedades neocl�sicas pudieran ser agregadas con el fi n de generar una funci�n
This paper confirms and expands on an earlier study (Churchill and Lewis 1985) into the profitability of bank lending to small businesses—those under $50 million in sales. The earlier study found that bank lending to small companies was more costly than lending to large corporations due primarily to administrative costs and risk that were higher (per dollar of loan) than the interest differential charged. It found, however, that the larger deposit balances left with the bank not only offset these costs but made lending to small firms 2.76 percentage points more profitable. This suggested that small businesses should be able to continue to borrow from large banks in spite of the consolidation now taking place in the banking industry.
AN ISSUE OF CONCERN to the theory of business finance over the past two decades has been the effect of financial structure on the valuation of firms. The traditional presumption is that a firm's value is a concave function of its financial leverage, and that an optimal financial leverage exists where the slope of the function is zero.' This argument is suspect to the extent that it attempts to value a firm's securities in isolation from the rest of the capital market. The pathbreaking works by Modigliani and Miller (MM) have provided the foundations for studying the effect of financial structure on the valuation of firms in equilibrium. MM (1958, 1969) establish that the total value of the firm, in the absence of taxes, remains constant across all degrees of financial leverage. Building on the foundations laid by MM, numerous authors2 have confirmed the MM no-tax thesis using a variety of equilibrium approaches. MM (1963) and some of these authors have shown further that a proportional corporate income tax provides sufficient economic incentive for firms to maximize their use of debt financing. However, in the five-year period from 1966 to 1970 the capital needs of nonfinancial corporations in the United States were financed approximately by two-thirds equity and one- third debt.3 Furthermore, the average corporate debt ratio (which reflects the valuation of equity at market value) is only approximately 20 percent.4 Even these highly aggregated figures suggest that an element of major importance to financial managers and the investing public is missing from the MM theory. Robicheck and Myers (1965, p. 20) and Hirshleifer (1970, p. 264) suggest that bankruptcy costs may represent the major missing element and that incorporating these costs within the foundations laid by MM may support the concept of an optimal capital structure. The importance of bankruptcy costs was particularly well demonstrated by Miller (1962) when he explicitly utilized bankruptcy costs to * Visiting Associate Professor of Finance, Purdue University, on leave from the Ohio State University. Acknowledgement. This paper is based on Chapter Five of my Ph.D. thesis (Kim (1974)) at State