An empirical investigation of the financial growth life cycle

Mac an Bhaird, Ciarán and Lucey, Brian (2010): An empirical investigation of the financial growth life cycle. Published in: Journal of Small Business and Enterprise Development , Vol. 18, No. 4 (2011): pp. 715-731.

Abstract

The key contribution of this paper is an empirical examination of the financial growth life cycle model by combining a number of statistical tests. This approach is significantly different to that traditionally adopted in empirical investigations of SME financing, which is to examine the applicability of theories developed in corporate finance on panel data. Additionally, it presents data on personal sources of finance employed by firm owners, which is typically not available, even in comprehensive secondary databases.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial growth life cycle; Capital structure; Pecking order theory; Agency theory; Small and medium sized enterprises.
• Subjects: D - Microeconomics > D2 - Production and Organizations > D22 - Firm Behavior: Empirical Analysis; D - Microeconomics > D7 - Analysis of Collective Decision-Making > D70 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking ; Venture Capital ; Brokerage ; Ratings and Ratings Agencies; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business Economics

References

Ang, J. S. (1992), "On the Theory of Finance for Privately Held Firms", The Journal of Small Business Finance, Vol. 1 No. 3, pp. 185-203.

Avery, R. B., Bostic, R. W. and Samolyk, K. A. (1998), "The Role of Personal Wealth in Small Business Finance", Journal of Banking and Finance, Vol. 22 No. 6-8, pp. 1019-1061.

Basu, A. and Parker, S. C. (2001), "Family finance and new business start-ups", Oxford Bulletin of Economics and Statistics, Vol. 63 No. 3, pp. 333-358.

Berger, A. N. and Udell, G. F. (1995), "Relationship lending and lines of credit in small firm finance", The Journal of Business, Vol. 68 No. 3, pp. 351-381.

Bates, J. and Bell, M. (1973), "Small manufacturing business in Northern Ireland", Journal of the Statistical and Social Inquiry Society of Ireland, Vol. 22 No. 5, pp. 162-187.

Berger, A. N. and Udell, G. F. (1998), "The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle", Journal of Banking and Finance, Vol. 22 No. 6/8, pp. 613-673.

Berggren, B., Olofsson, C. and Silver, L. (2000), "Control aversion and the search for external financing in Swedish SMEs", Small Business Economics, Vol. 15 No. 3, pp. 233-242.

Binks, M., Jennings, A. and Vale, P. (1986), "Tripartite funding and the constriction of enterprise", in Faulkner, T., Beaver, G., Lewis, J. and Gibb, A. (Eds.), Readings in Small Business, Gower, Aldershot, England, pp. 1-26.

Bygrave, W. D. and Quill, M. (2007), "Global Entrepreneurship Monitor 2006, Financing report", Babson College and London Business School, Wellesley-London.

Chittenden, F., Hall, G. and Hutchinson, P. (1996), "Small firm growth, access to capital markets and financial structure: Review of issues and an empirical investigation", Small Business Economics, Vol. 8 No. 1, pp. 56-67.

Chittenden, F., Poutziouris, P., Michaelas, N. and Watt, T. (1998), "The March 1998 budget and small business taxation", National Westminster Bank, London.

Cole, R. A. (2008), "What do we know about the capital structure of privately held firms? Evidence from the surveys of small business finances", Small Business Administration, Office of Advocacy, Washington D.C..

Cox, B. G., Elliehausen, G. E. and Wolken, J. D. (1989), "Surveying small businesses about their finances", in Proceedings of the international conference of the American Statistical Association, Section on survey research methods, American Statistical Association, Virginia, pp. 553-557.

Cressy, R. (2006), "Why do most firms die young?" Small Business Economics, Vol. 26 No. 2, pp. 103-116.

D' Amboise, G. and Muldowney, M. (1988), "Management theory for small business: Attempts and requirements", Academy of Management Review, Vol. 13 No. 2, pp. 226.

Daskalakis, N. and Psillaki, M. (2008), "Do country or firm factors explain capital structure? Evidence from SMEs in France and Greece", Applied Financial Economics, Vol. 18 No. 2, pp. 87 - 97.

Diamond, D. W. (1989), "Reputation acquisition in debt markets", Journal of Political Economy, Vol. 97 No. 4, pp. 828-862.

European Commission (2003), "Commission recommendation of 6 May 2003 concerning the definition of small and medium-sized enterprises", Official Journal L 124 2003/361/EC, Brussels.

Evans, D. S. and Jovanovic, B. (1989), "An estimated model of entrepreneurial choice under liquidity constraints", Journal of Political Economy, Vol. 97 No. 4, pp. 808-827.

Fairlie, R. W. (1999), "The absence of the African-American owned business: An analysis of the dynamics of self-employment", Journal of Labor Economics, Vol. 17 No. 1, pp. 80-108.

Fisman, R. and Love, I. (2003), "Trade credit, financial intermediary development, and industry growth", The Journal of Finance, Vol. 58 No. 1, pp. 353-374.

Fluck, Z., Holtz-Eakin, D. and Rosen, H. S. (1998), "Where does the money come from? The financing of small entrepreneurial enterprises", Occasional paper no. 191, Metropolitan studies program series, Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse.

Gompers, P. A. (1995), "Optimal investment, monitoring, and the staging of venture capital", The Journal of Finance, Vol. 50 No. 5, pp. 1461-1489.

Gregory, B. T., Rutherford, M. W., Oswald, S. and Gardiner, L. (2005), "An empirical investigation of the growth cycle theory of small firm financing", Journal of Small Business Management, Vol. 43 No. 4, pp. 382-392.

Hair, J. F., Black, W. C., Babin, B. J., Anderson, R. E. and Tatham, R. L. (2006), Multivariate Data Analysis, Pearson Prentice Hall, Upper Saddle River, New Jersey.

Hanks, S. H., Watson, C. J., Jansen, E. and Chandler, G. N. (1994), "Tightening the life-cycle construct: A taxonomic study of growth stage configurations in high-technology organisations", Entrepreneurship Theory and Practice, Vol. 18 No. 2, pp. 5-29.

Hogan, T. and Hutson, E. (2005), "Capital Structure in new technology-based firms: Evidence from the Irish software sector", Global Finance Journal, Vol. 15 No. 3, pp. 369-387.

Howorth, C. A. (2001), "Small firms' demand for finance: A research note", International Small Business Journal, Vol. 19 No. 4, pp. 78-86.

Hubbard, R. G. (1997), "Tax policy and investment", in Auerbach, A. J. (Ed.) Fiscal Policy: Lessons from Economic Research, MIT Press, Cambridge.

Hussain, J. and Matlay, H. (2007), "Financing preferences of ethnic minority owner/managers in the UK", Journal of Small Business and Enterprise Development, Vol. 14 No. 3, pp. 487-500.

Huyghebaert, N. and Van De Gucht, L. M. (2007), "The determinants of financial structure: New insights from business start-ups", European Financial Management, Vol. 13 No. 1, pp. 101-133.

Jensen, M. C. and Meckling, W. H. (1976), "Theory of the firm: Managerial behaviour, agency costs and ownership structure", Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.

Kimberly, J. R. and Miles, R. H. (1980), "Preface", Kimberly, J. R., Miles, R. H. and Associates (Eds.), The Organizational Life Cycle: Issues in the Creation, Transformation, and Decline of Organizations, Jossey-Bass, San Francisco, California, pp. ix-xiii.

Lecornu, M. R., McMahon, R. G. P., Forsaith, D. M. and Stanger, A. M. J. (1996), "The small enterprise financial objective function", Journal of Small Business Management, Vol. 34 No. 3, pp. 1-14.

Lester, D. L., Parnell, J. A., Crandall, W. and Menefee, M. L. (2008), "Organizational life cycle and performance among SMEs: Generic strategies for high and low performers", International Journal of Commerce and Management, Vol. 18 No. 4, pp. 313-330.

Mac an Bhaird, C. (2010) The Modigliani-Miller proposition after fifty years and its relation to entrepreneurial finance. Strategic Change, Vol 19, pp. 9-28.

Mac an Bhaird, C. and Lucey, B. (2010), "Determinants of capital structure in Irish SMEs", Small Business Economics, Vol. 35 No. 3, pp. 357-375.

Michaelas, N., Chittenden, F. and Poutziouris, P. (1999), "Financial policy and capital structure choice in UK SMEs: Empirical evidence from company panel data", Small Business Economics, Vol. 12 No. 2, pp. 113-130.

Mulcahy, D. (2005), "Angels and IPOs: Policies for sustainable equity financing of Irish small businesses", Studies in public policy no. 16, The Policy Institute, Trinity College Dublin.

Myers, S. C. (1984), "The capital structure puzzle", The Journal of Finance, Vol. 39 No. 3, pp. 575-592.

Myers, S. C. and Majluf, N. S. (1984), "Corporate financing and investment decisions when firms have information that investors do not have", Journal of Financial Economics, Vol. 13 No. 2, pp. 187-221.

Ou, C. and Haynes, G. W. (2006), "Acquisition of additional equity capital by small firms: Findings from the National Survey of Small Business Finances", Small Business Economics, Vol. 27 No. 2/3, pp. 157-168.

Penrose, E. T. (1952), "Biological analogies in the theory of the firm", American Economic Review, Vol. 42 No. 5, pp. 804.

Penrose, E. T. (1959), The Theory of the Growth of the Firm, John Wiley & Son, New York.

Poutziouris, P. (2003), "The strategic orientation of owner-managers of small ventures", International Journal of Entrepreneurial Behaviour and Research, Vol. 9 No. 5, pp. 185-214.

Rafuse, M. E. (1996), "Working capital management: An urgent need to refocus", Management Decision, Vol. 34 No. 2, pp. 59.

Rajan, R. G. (1992), "Insiders and outsiders: The choice between informed and arm's-length debt", The Journal of Finance, Vol. 47 No. 4, pp. 1367-1400.

Ray, G. H. and Hutchinson, P. J. (1983), The Financing and Financial Control of Small Enterprise Development, Gower, Aldershot.

Robb, A. (2002), "Small business financing: Differences between young and old Firms", Journal of Entrepreneurial Finance and Business Ventures, Vol. 7 No. 2, pp. 45-65.

Rostow, W. W. (1960), The Stages of Economic Growth, Cambridge University Press, Cambridge.

Small Business Service (2006), "Annual small business survey 2005: Executive summary", Department of Trade and Industry, London.

Smith, R. L. and Smith, J. K. (2004), Entrepreneurial Finance, Wiley, New York.

Sogorb Mira, F. (2005), "How SME uniqueness affects capital structure: Evidence from a 1994-1998 Spanish data panel", Small Business Economics, Vol. 25 No. 5, pp. 447-457.

Steinmetz, L. L. (1969), "Critical stages of small business growth", Business Horizons, Vol. 12 No. 1, pp. 29-36.

Ullah, F. and Taylor, P. (2007), "Are UK technology-based small firms still finance constrained?" The International Entrepreneurship and Management Journal, Vol. 3 No. 2, pp. 189-203.

Voordeckers, W. and Steijvers, T. (2006), Business collateral and personal commitments in SME lending. Journal of Banking and Finance, 30 (11): 3067-3086.

Vos, E., Jia-Yuh Yeh, A., Carter, S. and Tagg, S. (2007), "The happy story of small business financing", Journal of Banking and Finance, Vol. 31 No. 9, pp. 2648-2672.

Weston, J. F. and Brigham, E. F. (1978), Managerial Finance, Dryden Press, Fort Worth, Texas.

Wilson, N. and Summers, B. (2002), "Trade credit terms offered by small firms: Survey evidence and empirical analysis", Journal of Business Finance and Accounting, Vol. 29 No. 3/4, pp. 317-351.