Share:


Comparative study of the relevance of equity financing in European SMEs

Abstract

This paper contributes to the academic debate on the pecking order theory and SMEs equity financing, in this equity financing gap. In order to address this problem, this study relies on the empirical design that is driven by the premises of the pecking order theory and distinguishes between the relevance of internal funds vs. external equity. The main aim of this study is to investigate whether the relevance of equity financing for European SMEs is driven by the country-specifics (captured by the clusters of the EU countries) and whether there are any other factors that may potentially explain the relevance of internal funds or external equity, with respect to SMEs performance and characteristics. For that purposes the SAFE survey data were used to run non-parametric and correlations analysis. The results have clearly indicated that there are statistically significant differences between the clusters of the EU countries (if we differentiate between core and peripheral EU countries in particular). It was also found that there is no unified pattern of the associations between the relevance of equity financing and SMEs performance and characteristics, thus these associations seem to be influenced by the country-specifics as well.

Keyword : SMEs, EU member states, equity financing, internal funds, external equity, capital structure, pecking order, equity capital gap

How to Cite
Wieczorek-Kosmala, M., Błach, J., & Trzęsiok, J. (2020). Comparative study of the relevance of equity financing in European SMEs. Journal of Business Economics and Management, 21(6), 1543-1560. https://doi.org/10.3846/jbem.2020.13426
Published in Issue
Sep 29, 2020
Abstract Views
1917
PDF Downloads
1339
Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

References

Adair, P., & Adaskou, M. (2015). Trade-off-theory vs. pecking order theory and the determinants of corporate leverage: Evidence from a panel data analysis upon French SMEs (2002–2010). Cogent Economics & Finance, 3(1), 1–12. https://doi.org/10.1080/23322039.2015.1006477

Andrieu, G., Staglianò, R., & Van Der Zwan, P. (2018). Bank debt and trade credit for SMEs in Europe: firm-, industry-, and country-level determinants. Small Business Economics, 51(1), 245–264. https://doi.org/10.1007/s11187-017-9926-y

Allen, D. E. (1993). The pecking order hypothesis: Australian evidence. Applied Financial Economics, 3(2), 101–112. https://doi.org/10.1080/758532828

Arsov, S., & Naumoski, A. (2016). Determinants of capital structure: An empirical study of companies from selected post-transition economies. Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za Ekonomsku Teoriju i Praksu, 34(1), 119–146. https://doi.org/10.18045/zbefri.2016.1.119

Baker, M., & Wurgler, J. (2002). Market timing and capital structure. Journal of Finance, 57(1), 1–32. https://doi.org/10.1111/1540-6261.00414

Bartlett, W., & Prica, I. (2017). Interdependence between core and peripheries of the European economy: secular stagnation and growth in the Western Balkans. European Journal of Comparative Economics, 14(1), 123–139. https://doi.org/10.2139/ssrn.2729882

Baskin, J. (1989). An empirical investigation of the pecking order hypothesis. Financial Management, 18(1), 26–35. https://doi.org/10.2307/3665695

Bistrova J., Lace, N., & Peleckienė, V. (2011). The influence of capital structure on Baltic corporate performance. Journal of Business Economics and Management, 12(4), 655–669. https://doi.org/10.3846/16111699.2011.599414

Bongini, P., Ferrando, A., Rossi, E., & Rossolini, M. (2019). SME access to market-based finance across Eurozone countries. Small Business Economics, 1–31. https://doi.org/10.1007/s11187-019-00285-z

Bruha, J., & Kocenda, E. (2018). Financial stability in Europe. Banking and sovereign risk. Journal of Financial Stability, 36, 305–321. https://doi.org/10.1016/j.jfs.2018.03.001

Bulan, L. T., & Zhipeng, Y. (2010, August 12). Firm maturity and the pecking order theory. SSRN. https://doi.org/10.2139/ssrn.1760505

Carpenter, R. E., & Petersen, B. C. (2002). Capital market imperfections, high‐tech investment, and new equity financing. The Economic Journal, 112(477), F54–F72. https://doi.org/10.1111/1468-0297.00683

Colombo, M. G., & Grilli, L. (2007). Funding gaps? Access to bank loans by high-tech start-ups. Small Business Economics, 29(1–2), 25–46. https://doi.org/10.1007/s11187-005-4067-0

Cowling, M., Liu, W., & Ledger, A. (2012). Small business financing in the UK before and during the current financial crisis. International Small Business Journal, 30(7), 778–800. https://doi.org/10.1177/0266242611435516

Daskalakis, N., Jarvis, R., & Schizas, E. (2013). Financing practices and preferences for micro and small firms. Journal of Small Business and Enterprise Development, 20(1), 80–101. https://doi.org/10.1108/14626001311298420

Deffains-Crapsky, C., & Sudolska, A. (2014). Radical innovation and early stage financing gaps: equitybased crowdfunding challenges. Journal of Positive Management, 5(2), 3–19. https://doi.org/10.12775/JPM.2014.009

Delcoure, N. (2007). The determinants of capital structure in transitional economies. International Review of Economics & Finance, 16(3), 400–415. https://doi.org/10.1016/j.iref.2005.03.005

Donaldson, G. (2000). Corporate debt capacity: A study of corporate debt policy and the determination of corporate debt capacity. Beard Books (Original work published 1961).

Dong, M., Loncarski, I., Horst, J. T., & Veld, C. (2012). What drives security issuance decisions: Market timing, pecking order, or both? Financial Management, 41(3), 637–663. https://doi.org/10.1111/j.1755-053X.2012.01213.x

Dowling, M., O’gorman, C., Puncheva, P., & Vanwalleghem, D. (2019). Trust and SME attitudes towards equity financing across Europe. Journal of World Business, 54(6). https://doi.org/10.1016/j.jwb.2019.101003

Durvy, M. J. N. (2007). Equity Financing for SMEs: “The nature of the market failure”. In The SME Financing Gap (Vol. II): Proceedings of the Brasilia Conference, 27–30 March 2006 (Vol. 2, p. 126). OECD Publishing.

Ferrando, A., Popov, A., & Udell, G. F. (2017). Sovereign stress and SMEs’ access to finance: Evidence from the ECB’s SAFE survey. Journal of Banking & Finance, 81, 65–80. https://doi.org/10.1016/j.jbankfin.2017.04.012

Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2), 217–248. https://doi.org/10.1016/S0304-405X(02)00252-0

Haas, R., & Peeters, M. (2006). The dynamic adjustment towards target capital structure of firms in transition economies. Economics of Transition, 14, 133–169. https://doi.org/10.1111/j.1468-0351.2006.00237.x

Jong, A., Verbeek, M., & Verwijmeren, P. (2011). Firms’ debt–equity decisions when the static tradeoff theory and the pecking order theory disagree. Journal of Banking & Finance, 35(5), 1303–1314. https://doi.org/10.1016/j.jbankfin.2010.10.006

Kersten, R., Harms, J., Liket, K., & Maas, K. (2017). Small Firms, large Impact? A systematic review of the SME Finance Literature. World Development, 97, 330–348. https://doi.org/10.1016/j.worlddev.2017.04.012

Kędzior, M. (2012). Capital structure in EU selected countries – micro and macro determinants. Argumenta Oeconomica, 28, 69–117. http://yadda.icm.edu.pl/yadda/element/bwmeta1.element.ekon-element-000171349731

Koralun-Bereźnicka, J. (2013). How does asset structure correlate with capital structure? – cross-industry and cross-size analysis of the EU countries. Universal Journal of Accounting and Finance, 1(1), 19–28.

Kovacevic, T. (2019, May 28). EU budget: Who pays most in and who gets most back? BBC News. Retrieved November 11, 2019, from https://www.bbc.com/news/uk-politics-48256318

Kraus, A., & Litzenberger, R. H. (1973). A state-preference model of optimal financial leverage. Journal of Finance, 33, 911–922. https://doi.org/10.1111/j.1540-6261.1973.tb01415.x

Kumar, S., & Rao, P. (2015). A conceptual framework for identifying financing preferences of SMEs. Small Enterprise Research, 22(1), 99–112. https://doi.org/10.1080/13215906.2015.1036504

Leland, H. E., & Pyle, D. H. (1977). Information asymmetries, financial structure, and financial intermediation. Journal of Finance, 32(2), 371–378. https://doi.org/10.2307/2326770

Masiak, C., Moritz, A., & Lang, F. (2020). European SME financing: An empirical taxonomy. In Contemporary Developments in Entrepreneurial Finance (pp. 3–30). Springer, Cham. https://doi.org/10.1007/978-3-030-17612-9_1

Mason, C. M., & Harrison, R. T. (1995). Closing the regional equity capital gap: The role of informal venture capital. Small Business Economics, 7(2), 153–172. https://doi.org/10.1007/BF01108688

McNally, K. (1997). Corporate venture capital: Bridging the equity gap in the small business sector. Routledge. https://doi.org/10.4324/9780203443392

Moritz, A., Block, J. H., & Heinz, A. (2016). Financing patterns of European SMEs – an empirical taxonomy. An International Journal of Entrepreneurial Finance, 16(2), 115–148. https://doi.org/10.1080/13691066.2016.1145900

Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), 187–221. https://doi.org/10.1016/0304-405X(84)90023-0

Neely, L., & Van Auken, H. (2012). An examination of small firm bootstrap financing and use of debt. Journal of Developmental Entrepreneurship, 17(01). https://doi.org/10.1142/S1084946712500021

Nivorozhkin, E. (2004). The dynamics of capital structure in transition economies. Economics of Planning, 37(1), 25–45. https://doi.org/10.1007/s10644-004-1056-2

Ou, C. & Haynes, G. W. (2006). Acquisition of additional equity capital by small firms – findings from the national survey of small business finances. Small Business Economics, 27(2–3), 157–168. https://doi.org/10.1007/s11187-006-0009-8

Psillaki, M., & Daskalakis, N. (2009). Are the determinants of capital structure country or firm specific? Small Business Economics, 33(3), 319–333. https://doi.org/10.1007/s11187-008-9103-4

Ross, S. A. (1977). The determination of financial structure: The incentive signalling approach. Bell Journal of Economics, 8, 23–40. https://doi.org/10.2307/3003485

European Commission. (2018). SAFE. https://ec.europa.eu/growth/access-to-finance/data-surveys

Shyam-Sunder, L., & Myers, S. C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of Financial Economics, 51(2), 219–244. https://doi.org/10.1016/S0304-405X(98)00051-8

Whittam, G. P. S., & Wyper, J. (2007). The pecking order hypothesis: does it apply to start‐up firms? Journal of Small Business and Enterprise Development, 14(1), 8–21. https://doi.org/10.1108/14626000710727854

Wu, J., Song, J., & Zeng, C. (2008). An empirical evidence of small business financing in China. Management Research News, 31(12), 959–975. https://doi.org/10.1108/01409170810920666

Zoppa, A., & McMahon, R. G. P. (2002). Pecking order theory and the financial structure of manufacturing SMEs from Australia’s business longitudinal survey. Small Enterprise Research, 10(2), 23–41. https://doi.org/10.5172/ser.10.2.23