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The cost of discouragement Financial Constraints, Investment and Performances of Small Firms

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Presentation to ISBE 2019- Anastasia Ri

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The cost of discouragement Financial Constraints, Investment and Performances of Small Firms

  1. 1. The cost of discouragement Financial Constraints, Investment and Performances of Small Firms Stuart Fraser Anastasia Ri Mark Hart ISBE November 15th , 2019
  2. 2. How financial constraints affect small firms performances ? Mechanism? ? Research question Tangible Investment Intangible Investment Mediation mechanism - ↘ ↘ Fraser, Peng, Roper (2018) “Missing links: what mechanisms connect financial constraints to the performance of small firms”
  3. 3. Literature Entrepreneurship & Small business Literature Economics & Finance Literature Internal Finance Theory of Growth Relaxing perfect financial markets hypothesis and introducing information asymmetries, adverse selection and moral hazard -> Growth of small firms is constrained by the available quantity of internally generated finance Schiantarelli (1995) Hubbard (1998) Carpenter & Petersen (2002) Cash-flow vs fixed Investment Cash-flow vs Total Assets growth When facing binding financial constraints, a firm will exhibit a dollar-for-dollar relationship between growth of assets and internal finance. Drawbacks: Not a direct measure of financial constraints; Demand-side considerations neglected Entrepreneurial finance More nuanced approach to identifying financial constraints taking into account entrepreneurial cognition, ambition, life-cycle stages … “we know relatively little about the impact of financial constraints on small businesses growth due to the limitations of ‘internal finance approaches’ to testing financial constraints” Fraser, Bhaumik & Wright (2015) Cole & Sokolyk (2016) Mac an Bhaird, Vidal & Lucey (2016) Owen et al. (2019) Drawbacks: Difficulty of combining survey data with business data to measure performances
  4. 4. How financial constraints affect small firms performances ? Tools: data & methodology Tangible Investment Intangible Investment Mediation mechanism ↘ Longitudinal Small Business Survey 2015-2017 FAME BvD 2015-2017 Conditional Mixed Processes model: f* = f Zf +f I* = f,I f+I ZI + I p = f,p f + I,p I + p Zp + p
  5. 5. Did not apply for finance Applied for finance No need SELF- SUFFICIENT Obtained finance Did not obtain FAILED SEEKER SUCCESSFUL SEEKER Needed DISCOURAGED BORROWER Financially constrained Financial status – towards direct measure of financial constraint
  6. 6. LSBS-Fame matching Longitudinal Small Business Survey In 2015 – 15,000 obs Fame BvD 2015-2017 85,000 obs 1521 obs LSBS- Fame matched Self-Sufficient 68% Successful Seekers 26% Failed Seekers <1% Discouraged Borrowers ≈5% 20% 53% 0-5 years 6-10 years 11-20 years >20 years micro small medium
  7. 7. Financial Status in 2015 – what investment and performances in 2016? Tangible Assets /TA ΔTangibles / TA Intangible Assets / TA ΔIntangibles / TA Self-Sufficient 25 % 1.3% 7.9% -0.004% Successful Seekers 36% 3.5% 8.8% +0.9% Fin constrained 30% 0.8% 3.6% -0.004% Turnover growth Employment growth Productivity growth ROA Profit margin Self- Sufficient 9.3% 9.8% 54.5% 5.1% 5.4% Successful Seekers 3.5% 7.3% 20.9% 2.1% 3.3% Fin constrained 5.1% 1.6% 2.3% -3% 3.3
  8. 8. ? Findings No significant results… Financial Status SS FS DB Tangible Investment Intangible Investment Performances: •TA Growth •Employment growth •Turnover growth •Productivity growth •ROA + ? ? Perception of financial capabilities & business support + ?
  9. 9. •LSBS / BSD match – Employment, Turnover, Labour Productivity •What proxies for Tangible and Intangible investment? •What other sources? •…. Any ideas and suggestions are very welcome Thank you! No significant results… => Discouraged researcher?

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