Abstract
This study investigates small businesses’ financing decisions. Drawing upon asymmetric information theory, institutional theory and relevant literature on cognitive financial constraints, human cap...
Highlights
In the corporate finance literature, there has been a long investigation into the decision-making methods used by corporations in choosing which financing source to use for their investment projects
As such, when the external financing decisions of small businesses are being analysed, it is generally done via a strand of research that focuses on the relationship between formal and informal finances, with very little research being published on the tradeoffs that are associated with formal versus informal funding of small businesses (Wu et al 2016)
This study aims to fill these two particular gaps in the extant literature by proposing a comprehensive theoretical framework that may provide a better understanding of the mechanisms underlying small business financing decisions
Summary
In the corporate finance literature, there has been a long investigation into the decision-making methods used by corporations in choosing which financing source to use for their investment projects. Non-listed firms, especially those in the developing countries, are less likely to have optimal access to bank loans due to the informational asymmetries associated with their smallness and newness, both of which are well known to be small firm– specific financial constraints (see Carreira and Silva (2010) for a review). It is formal debt finance that is largely inaccessible to these firms; equity markets such as initial public offering (IPO), venture capital and angel funds are options that are not open to many small companies. As such, when the external financing decisions of small businesses are being analysed, it is generally done via a strand of research that focuses on the relationship between formal and informal finances, with very little research being published on the tradeoffs that are associated with formal versus informal funding of small businesses (Wu et al 2016). Casey and O’Toole (2014) point out that the literature on the relationship between informal credit and bank credit is not well developed and primarily focuses on households in rural areas rather than on small businesses
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