Small Business Economics

, Volume 20, Issue 4, pp 273–285

Trajectories of Small Business Financial Structure

  • Gavin C. Reid
Article

Abstract

A dynamic theory of the small firm is expounded, assuming entrepreneurs maximise business value over a finite time horizon. Predicted trajectories for key financial variables are seen to depend on whether debt or equity are cheaper. The predicted trajectories are compared with actual trajectories, using empirical evidence from three years of detailed primary source data on one hundred and fifty new business startups in Scotland. Evidence largely confirms predictions of the model, for the cheap equity case. For this case, as capital and sales rise steadily, debt is retired rapidly, except when interest rates on long-term debt are low. This finding is supported by explicit empirical trajectories of key financial variables.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ang, J. S., 1992, 'On the Theory of Finance for Privately Held Firms', Journal of Small Business Finance 1(3), 185-203.Google Scholar
  2. Binks, M., C. Ennew and C. Reed, 1992, 'Information Asymmetries and the Provision of Finance to Small Firms', International Small Business Journal 11(1), 35-46.Google Scholar
  3. Chittenden, F., G. Hall, and P. Hutchinson, 1996, 'Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation', Small Business Economics 8, 59-67.Google Scholar
  4. Cressy, Robert C., 1995, 'Borrowing and Control: A Theory of Business Types', Small Business Economics 7, 1-10.Google Scholar
  5. Cressy, Robert C., 1996a, 'Commitment Lending under Asymmetric Information: Theory and Tests on UK Startup Data', Small Business Economics 8, 1-12.Google Scholar
  6. Cressy, Robert C., 1996b, 'Pre-entrepreneurial Income, Cashflow Growth and Survival of Startup Businesses: Model and Tests on UK Startup Data', Small Business Economics 8.Google Scholar
  7. Cressy, Robert C., 1996c, 'Are Startups Debt-rationed?', The Economic Journal 106, 1253-1270.Google Scholar
  8. Daly, M. and A. McCann, 1992, 'How Many Small Firms?' Employment Gazette 100, 47-51.Google Scholar
  9. Evans, David and Boyan Jovanovic, 1989, 'An Estimated Model of Entrepreneurial Choice Under Liquidity Constraints', Journal of Political Economy 97, 808-827.Google Scholar
  10. Fazzari, Steven M., R. Glen Hubbard and Bruce Peterson, 1998, 'Financing Constraints and Corporate Investment', Brookings Papers on Economic Activity 1, 141-195.Google Scholar
  11. Feichtinger, G. and R.F. Hartl, 1986, Optimale Kontrolle Ökonomischer Prozesse, Berlin; De Gruyter.Google Scholar
  12. Guidici, G. and S. Paleari, 2000, The Provision of Finance to Innovation: A Survey Conducted Among Italian Technology-based Small Firms, Small Business Economics 14, 37-53.Google Scholar
  13. Hamilton, P. T. and M. A. Fox, 1998, 'The Financing 284 Gavin C. Reid Preferences of Small Firms Owners', International Journal of Entrepreneurial Behaviour and Research 4, 239-248.Google Scholar
  14. Hilten, O. V. van, P. M. Kort and P. J. J. M. van Loon, 1993, Dynamic Policies of the Firm: An Optimal Control Approach, Berlin: Springer-Verlag.Google Scholar
  15. Jensen, M. and W. Meckling, 1976, 'Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure, Journal of Financial Economics 3, 305-360.Google Scholar
  16. Lopez-Gracia, Jose, and Christina Aybar-Arias, 2000, 'An Empirical Approach to the Financial Behaviour of Small and Medium Sized Companies', Small Business Economics 14, 55-63.Google Scholar
  17. Modigliani, F. and M. Miller, 1958, 'The Cost of Capital, Corporate Finance and the Theory of Investment', American Economic Review 48(3), 291-297.Google Scholar
  18. Modigliani, F. and M. Miller, 1963, 'Taxes and the Cost of Capital: A Correction', American Economic Review 53(3), 433-443.Google Scholar
  19. Myers, S. C., 1984, 'The Capital Structure Puzzle', Journal of Finance 34, 575-592.Google Scholar
  20. Myers, S. And N. Majluf, 1984, 'Corporate Financing and Investment Decisions when Firms have Information that Investors do not Have', Journal of Financial Economics 13, 187-222.Google Scholar
  21. Reid, G. C., 1991, 'Staying in Business', International Journal of Industrial Organization 9, 545-556.Google Scholar
  22. Reid, G. C., 1992, 'Scale Economies in Small Entrepreneurial Firms', Scottish Journal of Political Economy 39, 39-51.Google Scholar
  23. Reid, G. C., 1993, Small Business Enterprise: An Economic Analysis, London; Routledge.Google Scholar
  24. Reid, G. C., 1995, 'Early Life-Cycle Behaviour of Micro-Firms in Scotland', Small Business Economics 7, 89-95.Google Scholar
  25. Reid, G. C., 1996, 'Financial Structure and the Growing Small Firm: Theoretical Underpinning and Current Evidence', Small Business Economics 8, 1-7.Google Scholar
  26. Reid, G. C. and L. R. Jacobsen, 1988, The Small Entrepreneurial Firm, Aberdeen: Aberdeen University Press.Google Scholar
  27. Reid, G. C. and J. A. Smith, 2000, 'What Makes a New Business Start-Up Successful?', Small Business Economics 14, 165-182.Google Scholar
  28. Richardson, G. B., 1964, 'The Limits to a Firm's Rate of Growth', Oxford Economic Papers 16, 9-23.Google Scholar
  29. Ross, S. A., 1977, 'The Determination of Financial Structure: the Incentive Signaling Approach', Bell Journal of Economics and Management Science (Spring), 23-40.Google Scholar
  30. Slater, M., 1980, 'The Managerial Limitation to the Growth of Firms', Economic Journal 90, 520-528.Google Scholar
  31. Wijst, D. van der, 1989, Financial Structure in Small Business: Theory, Tests and Applications, Berlin: Springer-Verlag.Google Scholar
  32. Wijst, Nico van der and Roy Thurik, 1993, 'Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data', Small Business Economics 5, 55-66.Google Scholar
  33. Winker, P., 1999, 'Causes and Effects of Financing Constraints at the Firm Level', Small Business Economics 12, 169-181.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Gavin C. Reid
    • 1
  1. 1.CRIEFF, Department of EconomicsUniversity of St Andrews, St Salvator's CollegeFifeScotland, U.K.

Personalised recommendations