Presentation to ISBE 2019- Anastasia Ri

1. The cost of discouragement
Financial Constraints, Investment and Performances
of Small Firms
Stuart Fraser
Anastasia Ri
Mark Hart
ISBE
November 15th , 2019

2. How financial constraints affect small firms performances ?
Mechanism?
?
Research question
Tangible Investment
Intangible Investment
Mediation
mechanism
-
↘
↘
Fraser, Peng, Roper (2018) “Missing links: what mechanisms connect
financial constraints to the performance of small firms”

3. Literature
Entrepreneurship & Small business
Literature
Economics & Finance Literature
Internal Finance Theory of Growth
Relaxing perfect financial markets hypothesis and
introducing information asymmetries, adverse selection
and moral hazard ->
Growth of small firms is constrained by the available
quantity of internally generated finance
Schiantarelli (1995)
Hubbard (1998)
Carpenter & Petersen (2002)
Cash-flow vs fixed Investment
Cash-flow vs Total Assets growth
When facing binding financial constraints, a firm will
exhibit a dollar-for-dollar relationship between growth
of assets and internal finance.
Drawbacks:
Not a direct measure of financial constraints;
Demand-side considerations neglected
Entrepreneurial finance
More nuanced approach to identifying financial
constraints taking into account entrepreneurial
cognition, ambition, life-cycle stages …
“we know relatively little about the impact of financial
constraints on small businesses growth due to the
limitations of ‘internal finance approaches’ to testing
financial constraints”
Fraser, Bhaumik & Wright (2015)
Cole & Sokolyk (2016)
Mac an Bhaird, Vidal & Lucey (2016)
Owen et al. (2019)
Drawbacks:
Difficulty of combining survey data with business
data to measure performances

4. How financial constraints affect small firms performances ?
Tools: data & methodology
Tangible Investment
Intangible Investment
Mediation mechanism
↘
Longitudinal
Small
Business
Survey
2015-2017
FAME BvD
2015-2017
Conditional Mixed Processes model:
f* = f Zf +f
I* = f,I f+I ZI + I
p = f,p f + I,p I + p Zp + p

5. Did not apply
for finance
Applied
for finance
No need
SELF-
SUFFICIENT
Obtained finance Did not obtain
FAILED SEEKER
SUCCESSFUL
SEEKER
Needed
DISCOURAGED
BORROWER
Financially constrained
Financial status –
towards direct measure of financial constraint

6. LSBS-Fame matching
Longitudinal
Small
Business
Survey
In 2015 –
15,000 obs
Fame BvD
2015-2017
85,000 obs
1521 obs
LSBS- Fame matched
Self-Sufficient
68%
Successful Seekers
26%
Failed Seekers
<1%
Discouraged
Borrowers
≈5% 20% 53%
0-5 years
6-10 years
11-20 years
>20 years
micro small medium

7. Financial Status in 2015 –
what investment and performances in 2016?
Tangible Assets
/TA
ΔTangibles / TA Intangible
Assets / TA
ΔIntangibles /
TA
Self-Sufficient 25 % 1.3% 7.9% -0.004%
Successful
Seekers 36% 3.5% 8.8% +0.9%
Fin constrained 30% 0.8% 3.6% -0.004%
Turnover
growth
Employment
growth
Productivity
growth
ROA Profit margin
Self-
Sufficient 9.3% 9.8% 54.5% 5.1% 5.4%
Successful
Seekers 3.5% 7.3% 20.9% 2.1% 3.3%
Fin
constrained 5.1% 1.6% 2.3% -3% 3.3

8. ?
Findings
No significant results…
Financial Status
SS
FS
DB
Tangible
Investment
Intangible
Investment
Performances:
•TA Growth
•Employment
growth
•Turnover growth
•Productivity
growth
•ROA
+
?
?
Perception of
financial capabilities
&
business support
+
?

9. •LSBS / BSD match – Employment, Turnover, Labour
Productivity
•What proxies for Tangible and Intangible investment?
•What other sources?
•….
Any ideas and suggestions are very
welcome
Thank you!
No significant results… => Discouraged researcher?