the economics of small business finance the roles of private equity and debt markets in the financial growth cycle abstract this article examines the economics of financing small business in private equity and debt markets firms are viewed through a financial growth cycle paradigm in which different capital structures are optimal at different points in the cycle we show the sources of small business finance and how capital structure varies with firm size and age the interconnectedness of small firm finance is discussed along with the impact of the macroeconomic environment we also analyze a number of research and policy issues review the literature and suggest topics for future research

spurious tests and sign reversals in international economics empirical tests of numerous theories in international economics e g the monetary explanation of the balance of payments exchange rate the portfolio balance model of capital flows purchasing power parity and covered interest rate arbitrage usually impose the subtractive linear constraint that corresponding foreign and domestic explanatory variables have equal but opposite effects on the dependent variable rasulo and wilford 15 investigate empirically the bias in general caused by such a restriction in monetary models of the balance of payments exchange rate 2 what is not recognized however is the peculiar nature and potential severity of the bias including sign reversals which results from subtracting as opposed to aggregating explanatory variables and the wide range of tests in international economics which may be spurious because of this type of bias

the relationship between bilateral and multilateral models of exchange rates abstract bilateral specifications of exchange rate models are expedient and widely used but their appropriateness in a multilateral world has not been examined formally this paper demonstrates that bilateral specifications are appropriate if i cross exchange rates are consistent ii multilateral weights are symmetric iii exchange rates are linear functions of domestic and foreign variables and iv coefficients on corresponding domestic and foreign variables are equal but opposite in sign conditions i iii and iv are common assumptions and evidence suggests that condition ii is met in approximate terms among most of the g 7 countries with the exceptions involving canada and japan

do firms get the financing they want measuring credit rationing experienced by small businesses in the u s this paper measures the extent to which small businesses in the united states in the late 1980s were able to access the external credit finance they desired we argue that a comprehensive definition of credit rationing must account for both a creditworthy firms that apply for and are denied financing and b creditworthy firms that decide not to apply for desired external financing given expectations about how long it may take to obtain financing and the evolution of investment opportunities

loan collateral decisions and corporate borrowing costs we examine the relation between borrowing costs and the presence of loan collateral we find the presence of collateral increases with default risk consistent with low quality borrowers reducing their risks and borrowing costs through the use of collateral by explicitly controlling for the interdependence between the decision to pledge collateral and borrowing costs we find that secured loans have predicted spreads substantially lower than if they had been made on an unsecured basis alternatively loans made on an unsecured basis have spreads not substantially different from if they had been secured the evidence suggests that collateral pledging decisions are generally consistent with borrowing cost minimization

does corporate lending by banks and finance companies differ evidence on specialization in private debt contracting this paper establishes empirically the existence of specialization in private market corporate lending adding a new dimension to the public versus private debt distinctions now common in the literature comparing corporate loans made by banks and by finance companies we find that the two types of intermediaries are equally likely to finance information problematic firms however finance companies tend to serve observably riskier borrowers particularly more leveraged borrowers evidence supports both regulatory and reputation based explanations for this specialization in passing we shed light on various theories of debt contracting and intermediation and present facts about finance companies

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

international capital mobility the factor content of trade and leontief paradoxes abstract in a world where capital is internationally mobile care is required in interpreting data on the factor content of trade us data for the 1960s seems to suggest that the us should have been abundantly endowed with labour relative to capital in comparison with the world as a whole ethier and svensson s 1986 j international economics 20 pp 21 42 work on international factor mobility provides the basis for an interesting re examination of such leontief paradoxes given that the us exports capital services directly its exports of goods would on average be intensive in its relatively abundant internationally immobile factors and thus need not be capital intensive

the leontief paradox continued according to leamer 1980 the leontief paradox is based on a simple conceptual misunderstanding in a multifactor version of the heckscher ohlin model he argues that a capital abundant country need not have its exports more capital intensive than its importsprovided that the country s commodity trade embodies a net export of both labor and capital services as was the case for the united states in leontief s 1954 data for such a country however the model does imply that capital per worker be greater in net exports than in consumption leamer finds that this implication is indeed consistent with leontief s data this note shows however that there is another feature of the trade data which is not so easily explained the fact that the united states exported labor services is in itself paradoxical as discussed below sec ii the model which leamer uses to explain the paradox implies that a country is a net exporter of labor services if and only if its aggregate expenditure per worker is less than that in the rest of the world this implication is clearly inconsistent with the evidence reviewed below in sec iii which shows that expenditure per worker was substantially greater in the united states than the rest of the world and yet the united states exported labor services therefore a modified version of the leontief paradox continues to stand

the theorems of international trade with factor mobility abstract this paper addresses the relation between goods trade and international factor mobility in general terms the basic theorems of international trade suitably interpreted are shown to hold in their strong versions if the number of international markets for goods and factors is at least as large as the number of factors the crucial dimensionality issue is hence not the relative number of goods and factors per se but the number of international markets relative to the number of factors only the price version of the heckscher ohlin theorem fails to be essentially preserved by this condition

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

a test of the heckscher ohlin vanek theorem the leontief commonplace abstract this paper provides a logically complete empirical test of the hov theorem for the united states by comparing measures of factor intensities trade and factor endowments under the appropriate computations of the factor contents of trade and production u s data are shown to diverge often from their values as predicted by hov as a result it appears that paradoxical outcomes may be common in empirical applications of the theorem

uk bank services for small business how competitive is the market abstract this study is the first to employ an econometric model to examine the pricing behaviour of british financial institutions with respect to key bank products services offered to small and medium sized enterprises smes including current accounts investment accounts business loans and mortgages a mean group approach is used on a panel of monthly data to gauge individual banks reactions to identify factors influencing the setting of deposit and loan rates and to assess the competitive structure that best describes the uks sme banking market though the results should be interpreted with caution the empirical evidence is suggestive of a complex oligopoly policies directed at improving information and making it easier for small businesses to change banks accounts would reduce inertia and improve competition among financial institutions

the latent demand for bank debt characterizing discouraged borrowers concerns that small firms encounter credit constraints are well entrenched in the literature despite widespread empirical evidence that a relatively small proportion of small firms have their loan applications rejected however many firms may be discouraged from applying for fear of rejection these businesses are the focus of this paper based on responses to a large scale postal survey of uk small and medium sized enterprises smes we find that twice as many businesses were discouraged from applying for a bank loan than had their loan request denied more particularly we observe a number of distinguishing characteristics of discouraged borrowers relative to applicants these include strategy sector prior entrepreneurial experience and banking relationships the implications of our findings for policy and future research are briefly discussed

multiple versus single banking relationships theory and evidence a theory of the optimal number of banking relationships is developed and tested using matched bank firm data according to the theory relationship banks may be unable to continue funding profitable projects owing to internal problems and a firm may thus have to refinance from nonrelationship banks the latter however face an adverse selection problem as they do not know the quality of the project and may refuse to lend in these circumstances multiple banking can reduce the probability of an early liquidation of the project the empirical evidence supports the predictions of the model

are good or bad borrowers discouraged from applying for loans evidence from us small business credit markets this paper takes the concept of a discouraged borrower originally formulated by kon and storey kon y storey d j 2003 a theory of discouraged borrowers small business economics 21 37 49 and examines whether discouragement is an efficient self rationing mechanism using us data it finds riskier borrowers have higher probabilities of discouragement which increase with longer financial relationships suggesting discouragement is an efficient self rationing mechanism it also finds low risk borrowers are less likely to be discouraged in concentrated markets than in competitive markets and that in concentrated markets high risk borrowers are more likely to be discouraged the longer their financial relationships we conclude discouragement is more efficient in concentrated than in competitive markets

opacity of young businesses evidence from rating disagreements abstract a conventional wisdom in the contemporary corporate finance literature argues that small and medium sized enterprises smes are informationally opaque we use data from two credit information companies and in particular their disagreements over the creditworthiness of smes to study the empirical relevance of this often invoked assumption our panel data analysis shows that once unobserved firm effects are controlled for the disagreements i e rating splits are inversely related to the age of firms we are not able to document such a robust relationship between the disagreements and the size of firms this finding holds a lesson for empirical corporate finance researchers who need firm level proxies for informational imperfections and asymmetries of the two often used proxies firm size is not as closely related to informational opacity as firm age is

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

a theory of discouraged borrowers this paper examines the implications for the sme financing market of application costs that vary between firms and of imperfect screening of applicants by banks under these conditions discouraged borrowers can exist these are good borrowers who do not apply for a bank loan because they feel they will be rejected the paper shows that under a range of assumptions the scale of discouragement in an economy depends upon the screening error of the banks the scale of application costs and the extent to which the bank interest rate differs from that charged by the moneylender discouragement is shown to be at a maximum where there is some but not perfect information

small and medium size enterprises access to finance as a growth constraint abstract this paper presents recent research on access to finance by small and medium size enterprises smes smes form a large part of private sector in many developed and developing countries while cross country research sheds doubt on a causal link between smes and economic development there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance potentially explaining the lack of smes contribution to growth financial and institutional development helps alleviate smes growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well developed institutions as can systems of credit information sharing and a more competitive banking structure

competition small business financing and discrimination evidence from a new survey we analyze credit applications loan denials and interest rates paid by small businesses across owner gender race and ethnicity in addition we examine data from owners who said they did not apply for credit because they believed that their applications would have been turned down after controlling for a rich set of explanatory variables including personal and business credit histories substantial differences in denial rates between firms owned by african americans and white males remain moreover consistent with becker s classic theories 1957 we find evidence that increases in competition in the firm s local banking market reduces these differences