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Small new firms and the return to alternative sources of finance

Abstract

This study analyses the returns to alternative sources of finance in the small new firm sector. Prior work in this area has concentrated on large established firms and has been subject to significant problems of interpretation. Many of these problems are absent when considering small new firms and this paper suggests that the various forms of finance used differ in terms of the return on capital employed they are associated with. In particular, sources of bank finance for small new firms are associated with higher returns than other available sources of finance.

This paper, therefore, supports the results of Baumol et al. (1970, 1973) that externally raised finance is associated with higher returns vis-à-vis internally raised finance and suggests that small new firms are either inefficient in their use of funds or suffer from imperfections in capital markets. The determination of which of these arguments applies, however, awaits further research.

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Keasey, K., McGuinness, P. Small new firms and the return to alternative sources of finance. Small Bus Econ 2, 213–222 (1990). https://doi.org/10.1007/BF00389529

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Keywords

  • Study Analysis
  • Capital Market
  • Prior Work
  • Significant Problem
  • Industrial Organization