Library

Home > Library > The happy story of small business finance

The happy story of small business finance

Author Andy Yeh Alpha

This research article empirically tests the financial contentment hypothesis for small business owners in both America and Britain.

Description:

We empirically examine the American and British survey datasets for about 16,000 privately held small businesses. The financial behavior of private firms demonstrates substantial financial contentment. We find fewer than 10% of the British firms seek rapid firm expansion while only 1.32% of American private firms view a lack of capital other than working capital as a major financial problem. Financial performance indicators such as sales growth, return-on-assets, and net profit margin are insignificant determinants of small business finance. This evidence contradicts the conventional financial lifecycle paradigm of Berger and Udell (1995, 1998, 2002). Younger and less educated private-firm owners more actively use external finance even though more education reduces the fear of bank loan denial, whereas, older and wiser small business owners with better education are less likely to tap into external finance.

 

Our financial contentment hypothesis for privately held firms also extends to small businesses that seek rapid firm expansion. These high-growth firms participate more in the bank loan markets than low-growth firms. In stark contrast to the financing-gap hypothesis of Berger and Udell (1995, 1997, 2002), our financial contentment hypothesis observes the importance of both social networks and connections for small business finance and in turn confirms the empirical nexus between private owner involvement and sustainable growth. In this light, small private firms serve as a robust investment vehicle for long-term sustainable development.

 

Overall, our empirical evidence sheds skeptical light on the theoretical plausibility of the agency lifecycle prediction that the vast majority of private firms suffer from severe financial constraints or financing gaps (Jensen and Meckling, 1976; Jensen, 1986; Stulz, 1990; Lang, Stulz, and Walking, 1991; Berger and Udell, 1995, 1998, 2002; Ang, Cole, and Lin, 2000; Bitler, Moskowitz, and Vissing-Jorgensen, 2005). The preponderance of our empirical results proposes a case for an alternative theory of corporate finance for privately held firms that differ from publicly traded corporations in many fundamental ways. This proposal calls for a paradigm shift in rethinking about the conventional wisdom that private firms cannot grow as fast as their public counterparts due to a lack of reasonable access to external capital.

 

Blog+More

AYA fintech finbuzz analytic report on the global macro economic outlook Summer-Fall 2019

Andy Yeh Alpha

2019-08-07 08:32:00 Wednesday ET

AYA fintech finbuzz analytic report on the global macro economic outlook Summer-Fall 2019

Our fintech finbuzz analytic report shines fresh light on the current global economic outlook. As of Summer-Fall 2019, the current analytic report focuses o

+See More

Federal Reserve raises the interest rate again in mid-2018 in response to 2% inflation and wage growth.

John Fourier

2018-07-09 09:39:00 Monday ET

Federal Reserve raises the interest rate again in mid-2018 in response to 2% inflation and wage growth.

The Federal Reserve raises the interest rate again in mid-2018 in response to 2% inflation and wage growth. The current neutral interest rate hike neither b

+See More

Platform enterprises leverage network effects, scale economies, and information cascades to boost exponential user growth.

Fiona Sydney

2020-05-28 15:37:00 Thursday ET

Platform enterprises leverage network effects, scale economies, and information cascades to boost exponential user growth.

Platform enterprises leverage network effects, scale economies, and information cascades to boost exponential business growth. Laure Reillier and Benoit

+See More

AYA finbuzz podcast offers fresh insights into the latest stock market issues and economic trends for better and wiser investment decisions.

Daphne Basel

2019-07-31 11:34:00 Wednesday ET

AYA finbuzz podcast offers fresh insights into the latest stock market issues and economic trends for better and wiser investment decisions.

AYA Analytica finbuzz podcast channel on YouTube July 2019 In this podcast, we discuss several topical issues as of July 2019: (1) All 18 systemical

+See More

The current Trump stock market rally has been impressive from November 2016 to October 2017.

John Fourier

2017-10-09 09:34:00 Monday ET

The current Trump stock market rally has been impressive from November 2016 to October 2017.

The current Trump stock market rally has been impressive from November 2016 to October 2017. S&P 500 has risen by 21.1% since the 2016 presidential elec

+See More

The Trump administration mulls over antitrust actions against Amazon, Facebook, and Google.

Monica McNeil

2018-11-19 09:38:00 Monday ET

The Trump administration mulls over antitrust actions against Amazon, Facebook, and Google.

The Trump administration mulls over antitrust actions against Amazon, Facebook, and Google. President Trump indicates that the $5 billion fine against Googl

+See More