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