Abstract
This study examines the impact of financial structures on the growth of micro firms in Sweden. The objective of this paper is to explore whether firms’ growth can be associated with patterns of financial acquisition and whether these patterns influence firms’ growth differently when the source is either internal or external. Based on agency cost theory, hypotheses were formulated and tested with panel data consisting of 12 101 micro firms, using 84 707 observations for the period 2006–2007. The data were analysed using the seemingly unrelated regression (SUR) model. The empirical results reveal that internal financial sources – retained profit – significantly influence firm growth. Similarly, short-term debt and growth are positively related. However, firm growth is generally more sensitive to retained profit than short-term debt. Interestingly, long-term debt generally has no effect on growth. The findings also indicate that size, age, and industry affiliation influence firm growth. Finally, agency cost theory is relevant in explaining the relationship between financing pattern and growth.
Highlights
Firm growth and, in particular, small firm growth has become one of the most important themes in business literature
The paper has investigated two questions: How is firm growth associated with pattern of financing sources? Are internal or external sources linked differently to firm growth? In particular, the purpose of the analysis has been to shed some light on the impact of capital structure and sources of funding on firm growth
The study focused on a few variables to explain growth among Swedish micro firms
Summary
In particular, small firm growth has become one of the most important themes in business literature. An increase in firm growth might increase demand from it towards other sectors, which could enhance economic activity and as a result lead to growth at the macro level. The generation of employment and employment dynamics, as well as contribution to productivity and economic growth, are other factors that have attracted considerable attention to small firm growth and made it an interesting field of study (North & Smallbone, 1995; Wiklund, 1998). Small firms face financial constraints and difficulties in acquiring financial sources due to market imperfection, moral hazard, informational asymmetries, and the agency problem (Myers, 1977; Myers & Majluf, 1984). There is a relatively large body of literature on growth determinants and barriers to growth, but the impact of internal and external financial sources on firm growth has remained unexplored
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