Abstract
Using a novel methodology, we estimate the gap between supply and demand financing of small and medium-sized enterprise (SME) financing in several European countries. We find the largest loan gap spreads are in Poland and the Netherlands. Specifically, our results show the upper boundary of the loan gap is the lowest in Romania and the highest in the Netherlands. Moreover, the lowest lower boundary of the equity gap is in the Netherlands, while the highest lower boundary is in Romania. Overall, our results suggest that there is a significant difference between the estimated demand and supply of equity, which is on average 3% of GDP.
Highlights
The analysis leads to the conclusion that SMEs in the Research Countries are important drivers of economic growth and add significant value to their respective economies
If we look at the average Assets Under Management (AUM) of private equity (PE) firms in every country, we see that French firms are more concentrated, with two times more capital under management than the other countries in this study
In light of these findings, we conclude that the SME sector is facing limited access to financing, as a consequence of having to compete with other institutions in the market for a shrinking pool of financial resources
Summary
The recent financial crisis revealed corporate governance flaws in banks and financial institutions across Europe. Capital markets in some parts of Europe continue to lag behind the rest of the world In these regions, there has been little dynamism in the rest of the financial markets. Previous chapters expressed some concern that capital markets in these countries are not yet a real source of financing and have failed to sustain business growth. Rajan and Zingales (1998a) show that companies in countries with robust financial systems often develop a higher dependence on external financing. In order to provide a strong foundation for financial market development, this chapter will discuss the legal and institutional factors for the proper functioning of well-developed debt and equity markets. Higher levels of equity financing have the potential to increase external growth, leading to increases in the business and management skills of SMEs and improving their corporate governance and financial skills. This section discusses the most important conditions for the proper functioning of debt and equity capital markets
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