SME Financing: Investigation of Firm and Industry Effects

  • Ciarán Mac an Bhaird
Part of the Contributions to Management Science book series (MANAGEMENT SC.)


Empirical evidence from previous studies (Sogorb Mira 2005) and reports (Brierley and Kearns 2001; Cole 2008) suggests that firm characteristics such as size, age, growth, and profitability have a significant influence on a firm’s capital structure. Additionally, a number of studies suggest that asset structure is a primary determinant of firm financing (Bartholdy and Mateus 2008), implying inter-industry differences in capital structures, as firms in industries typified by greater levels of collateralisable assets have the capacity for, and may employ, greater levels of debt than firms with a higher concentration of intangible assets (Brierley and Kearns 2001). Indeed, intra-industry capital structures may be more comparable than inter-industry capital structures (Harris and Raviv 1991). In this chapter, the potential determining effect of firm characteristics on the source of finance employed is investigated by testing a number of multivariate regression models on financing data of firms in the sample. Whilst the multivariate regression approach employed in this study is not original, there are a number of novel features in the statistical methodology adopted and variables tested. Application of regression analysis on survey data is uncommon in finance (De Jong and Van Dijk 2007), particularly in SME finance, as previous empirical theory testing studies conducted multivariate regression models on panel data (Heyman et al. 2008; López-Gracia and Sogorb-Mira 2008). Additionally, this study employs data on sources of internal and external equity, in addition to debt, as dependent variables in regression models. This approach is an advancement on previously published studies, which typically tested regression models employing short- and long-term debt as dependent variables (Heyman et al. 2008), with very few published studies employing a measure of equity as a dependent variable (Ou and Haynes 2006), and none employing both measures. (The dearth of studies employing internal equity as a dependent variable is surprising, considering the well-documented reliance of SMEs on retained earnings (Vos et al. 2007; Cole 2008)). Furthermore, this study employs detailed data on provision of collateral by respondents as an independent variable. This approach is considered novel, as models developed in previous studies typically test firm characteristics such as age, profitability, and size, but do not include means of collateral provision.


Capital Structure Debt Financing Seemingly Unrelated Regression Firm Owner Sectoral Difference 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


  1. Avery RB, Bostic RW, Samolyk KA (1998) The role of personal wealth in small business finance. J Bank Finance 22(6–8):1019–1061CrossRefGoogle Scholar
  2. Balakrishnan S, Fox I (1993) Asset specificity, firm heterogeneity and capital structure. Strat Manag J 14(1):3–16CrossRefGoogle Scholar
  3. Baltagi BH (2005) Econometric analysis of panel data, 3rd edn. Wiley, ChichesterGoogle Scholar
  4. Bartholdy J, Mateus C (2008) Financing of SMEs: an asset side story. Paper presented at the conference "Financing of SMEs in Europe", Société Universitaire Européenne de Recherches Financiéres, Palais du Luxembourg, Paris, 11–12 SeptemberGoogle Scholar
  5. Berggren B, Olofsson C, Silver L (2000) Control aversion and the search for external financing in Swedish SMEs. Small Bus Econ 15(3):233–242CrossRefGoogle Scholar
  6. Bester H (1985) Screening vs. rationing in credit markets with imperfect information. Am Econ Rev 75(4):850–855Google Scholar
  7. Binks MR, Ennew C, Reed G (1988) Small business and banks: a two nation perspective. Report to the Forum of Private Business, UK and the National Federation of Independent Businesses, USAGoogle Scholar
  8. Black J, De Meza D, Jeffreys D (1996) House prices, the supply of collateral and the enterprise economy. Econ J 106(434):60–75CrossRefGoogle Scholar
  9. Blanco-Mazagatos V, De Quevedo-Puente E, Castrillo LA (2007) The trade-off between financial resources and agency costs in the family business: an exploratory study. Fam Bus Rev 20(3):199–213CrossRefGoogle Scholar
  10. Bougheas S (2004) Internal versus external financing of R&D. Small Bus Econ 22(1):1–17CrossRefGoogle Scholar
  11. Brierley P (2001) The financing of technology-based small firms: a review of the literature. Bank Engl Q Bull London 41(1):64–78Google Scholar
  12. Brierley PG, Kearns A (2001) The financing patterns of new and old economy firms in the UK. Bank of England Discussion Paper. London: Bank of EnglandGoogle Scholar
  13. Carpenter RE, Petersen BC (2002a) Capital market imperfections, high-tech investment, and new equity financing. Econ J 112(477):F54–F72CrossRefGoogle Scholar
  14. Chittenden F, Hall G, Hutchinson P (1996) Small firm growth, access to capital markets and financial structure: review of issues and an empirical investigation. Small Bus Econ 8(1):56–67CrossRefGoogle Scholar
  15. Coco G (2000) On the use of collateral. J Econ Surv 14(2):191–214CrossRefGoogle Scholar
  16. Cole RA (2008) What do we know about the capital structure of privately held firms? evidence from the surveys of small business finances. Small Business Administration, Washington, DCGoogle Scholar
  17. Daskalakis N, Psillaki M (2008) Do country or firm factors explain capital structure? evidence from SMEs in France and Greece. Appl Financ Econ 18(2):87–97CrossRefGoogle Scholar
  18. De Jong A, Van Dijk R (2007) Determinants of leverage and agency problems: a regression approach with survey data. Eur J Finance 13(6):565–593CrossRefGoogle Scholar
  19. Elston JA, Audretsch DB (2009) Financing the entrepreneurial decision: an empirical approach using experimental data on risk attitudes. Small Bus Econ (In press)Google Scholar
  20. Fu TW, Ke MC, Huang YS (2002) Capital growth, financing source and profitability of small businesses: evidence from Taiwan small enterprises. Small Bus Econ 18(4):257–267CrossRefGoogle Scholar
  21. Gallo MA, Tapies J, Cappuyns K (2004) Comparison of family and nonfamily business: financial logic and personal preferences. Family Bus Rev 17(4):303–318CrossRefGoogle Scholar
  22. Gregory BT, Rutherford MW, Oswald S, Gardiner L (2005) An empirical investigation of the growth cycle theory of small firm financing. J Small Bus Manag 43(4):382–392CrossRefGoogle Scholar
  23. Hair JF, Black WC, Babin BJ, Anderson RE, Tatham RL (2006) Multivariate data analysis, 6th edn. Pearson Prentice Hall, Upper Saddle RiverGoogle Scholar
  24. Hall G, Hutchinson PJ, Michaelas N (2000) Industry effects on the determinants of unquoted SMEs' capital structure. Int J Econ Bus 7(3):297–312CrossRefGoogle Scholar
  25. Harris M, Raviv A (1991) The theory of capital structure. J Finance 46(1):297–355CrossRefGoogle Scholar
  26. Heyman D, Deloof M, Ooghe H (2008) The financial structure of private held Belgian firms. Small Bus Econ 30(3):301–313CrossRefGoogle Scholar
  27. Jordan J, Lowe J, Taylor P (1998) Strategy and financial policy in UK small firms. J Bus Finance Account 25(1–2):1–27CrossRefGoogle Scholar
  28. Karine EM, Frank L, Laine K (2004) Effect of price on the diffusion of cellular subscriptions in Finland. J Prod Brand Manag 13(3):192–199CrossRefGoogle Scholar
  29. Leach JC, Melicher RW (2006) Entrepreneurial finance, 2nd edn. Thomson South-Western, MasonGoogle Scholar
  30. Lopez-Gracia J, Sanchez-Andujar S (2007) Financial structure of the family business: evidence from a group of small Spanish firms. Fam Bus Rev 20(4):269–287CrossRefGoogle Scholar
  31. López-Gracia J, Sogorb-Mira F (2008) Testing trade-off and pecking order theories financing SMEs. Small Bus Econ 31(2):117–136CrossRefGoogle Scholar
  32. Maherault L (2000) The influence of going public on investment policy: an empirical study of French family-owned businesses. Family Bus Rev 13(1):71–79CrossRefGoogle Scholar
  33. McConaugby DL, Matthews CH, Fialko AS (2001) Founding family controlled firms: performance, risk, and value. J Small Bus Manag 39(1):31–49CrossRefGoogle Scholar
  34. Michaelas N, Chittenden F, Poutziouris P (1999) Financial policy and capital structure choice in UK SMEs: empirical evidence from company panel data. Small Bus Econ 12(2):113–130CrossRefGoogle Scholar
  35. Mishra CS, McConaughy DL (1999) Founding family control and capital structure: the risk of loss of control and the aversion to debt. Entrepren Theor Pract 23(4):53–64Google Scholar
  36. Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13(2):187–221CrossRefGoogle Scholar
  37. Ou C, Haynes GW (2006) Acquisition of additional equity capital by small firms: findings from the national survey of small business finances. Small Bus Econ 27(2–3):157–168CrossRefGoogle Scholar
  38. Paul S, Whittam G, Wyper J (2007) The pecking order hypothesis: does it apply to start-up firms. J Small Bus Enterprise Dev 14(1):8–21CrossRefGoogle Scholar
  39. Petersen MA, Rajan RG (1994) The benefits of lending relationships: evidence from small business data. J Finance 49(1):3–37CrossRefGoogle Scholar
  40. Poutziouris PZ (2001) The views of family companies on venture capital: empirical evidence from the UK small to medium-size enterprising economy. Fam Bus Rev 14(3):277–291CrossRefGoogle Scholar
  41. Poutziouris P (2003) The strategic orientation of owner-managers of small ventures. Int J Entrepren Behav Res 9(5):185–214CrossRefGoogle Scholar
  42. Romano CA, Tanewski GA, Smyrnios KX (2001) Capital structure decision making: a model for family business. J Bus Venturing 16(3):285–310CrossRefGoogle Scholar
  43. Rosen HS (1998) The future of entrepreneurial finance. J Bank Finance 22(6–8):1105–1107CrossRefGoogle Scholar
  44. Smith RL, Smith JK (2004) Entrepreneurial finance, 2nd edn. Wiley, New YorkGoogle Scholar
  45. Sogorb Mira F (2005) How SME uniqueness affects capital structure: evidence from a 1994–1998 Spanish data panel. Small Bus Econ 25(5):447–457CrossRefGoogle Scholar
  46. Ueda M (2004) Banks versus venture capital: project evaluation, screening, and expropriation. J Finance 59(2):601–621CrossRefGoogle Scholar
  47. Ullah F, Taylor P (2005) The impact of science park and incubator location on the finance opportunities of technology-based small firms. In: During W, Oakey R, Kauser S (eds) New technology-based firms in the new millenium. Elsevier, OxfordGoogle Scholar
  48. Van Der Wijst N, Thurik R (1993) Determinants of small firm debt ratios: an analysis of retail panel data. Small Bus Econ 5(1):55–65CrossRefGoogle Scholar
  49. Vanacker T, Manigart S (2007) Incremental financing decisions in high growth companies: Pecking order and debt capacity considerations. Working paper series no. 2007–22, Vlerick Leuven Gent Management SchoolGoogle Scholar
  50. Voordeckers W, Steijvers T (2006) Business collateral and personal commitments in SME lending. J Bank Finance 30(11):3067–3086CrossRefGoogle Scholar
  51. Vos E, Jia-Yuh Yeh A, Carter S, Tagg S (2007) The happy story of small business financing. J Bank Finance 31(9):2648–2672CrossRefGoogle Scholar
  52. Voulgaris F, Asteriou D, Agiomirgianakis G (2004) Size and determinants of capital structure in the Greek manufacturing sector. Int Rev Appl Econ 18(2):247–262CrossRefGoogle Scholar
  53. Watson R, Wilson N (2002) Small and medium size enterprise financing: a note on some of the empirical implications of a pecking order. J Bus Finance Account 29(3–4):557–579CrossRefGoogle Scholar
  54. Zellner A (1962) An efficient method of estimating seemingly unrelated regressions and tests for aggregation bias. J Am Stat Assoc 57(298):348–368CrossRefGoogle Scholar
  55. Zoppa A, McMahon RGP (2002) Pecking order theory and the financial structure of manufacturing SMEs from Australia's business longitudinal survey. Research paper no. 02–1, School of Commerce, The Flinders University of South AustraliaGoogle Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2010

Authors and Affiliations

  1. 1.Fiontar Dublin City UniversityDublin 9Ireland

Personalised recommendations