Home > Library > 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.
2019-02-09 08:33:00 Saturday ET
Apple provides positive forward guidance on both revenue and profit forecasts for iPhones, iPads, and MacBooks. In the Christmas 2018 festive season, MacBoo
2020-11-17 08:27:00 Tuesday ET
Management consultants can build sustainable trust-driven client relations through the accelerant curve of business value creation. Alan Weiss (2016)
2019-10-11 13:40:00 Friday ET
Apple CEO Tim Cook maintains a frugal low-key lifestyle. With $625 million public wealth, Cook leads the $1 trillion tech titan Apple in the post-Jobs era.
2016-11-09 00:00:00 Wednesday ET
Universally dismissed as a vanity presidential candidate when he entered a field crowded with Republican talent, the former Democrat and former Independent
2020-11-22 11:30:00 Sunday ET
A brief biography of Andy Yeh Andy Yeh is responsible for ensuring maximum sustainable member growth within the Andy Yeh Alpha (AYA) fintech network pla
2018-03-03 11:37:00 Saturday ET
President Xi seeks Chinese congressional approval and constitutional amendment for abolishing his term limits of strongman rule with more favorable trade de