SME Performance

SME Performance

Separating Myth from Reality

John Watson

The performance of Small and Medium-sized Enterprises (SMEs) has been a subject of continual interest to both researchers and practitioners. This enlightening book investigates the pitfalls which have affected the assessment of SME performance in much of the past research.

Chapter 8: A Quantitative Analysis

John Watson

Subjects: business and management, entrepreneurship, economics and finance, international accounting


INTRODUCTION This chapter builds on the key findings of the previous chapter suggesting that banks do not routinely discriminate against female SME owners and that the notion of a ‘finance gap’ might be more ‘myth’ than ‘reality’. In particular, this chapter will contrast the implications that arise from Myers’ Pecking Order Theory (1984) with those that might be expected if, indeed, there is a ‘finance gap’ negatively impacting growth in the SME sector. 8.1 MYERS’ PECKING ORDER THEORY Based on the notion of asymmetric information and the costs of financial distress, Pecking Order Theory (Myers 1984) implies that SME owners will prefer to use internal sources of finance before external sources. According to this theory, SME owners will only consider external financing options where insufficient internal funds are available to take advantage of value adding opportunities. This suggests that younger firms that have not yet had the opportunity to generate significant levels of internal funds are more likely (than older firms) to require external funding. Based on Pecking Order Theory, we would expect a firm’s relative level of external debt to fall over time as the firm replaces external debt with internally generated funds. In other words, Pecking Order Theory suggests that, other things being equal, older firms will have lower levels of external debt than younger firms. 8.2 THE NOTION OF A ‘FINANCE GAP’ However, there are no guarantees that external finance providers will always be willing to lend to young SMEs with positive net present value projects. As...

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