Impact of the Global Crisis on SME Internal vs. External Financing in China
📝 Abstract
Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship is found between firm growth and debt ratio, though not highly significantly. It is shown that the SMEs with high growth rates are those which will more easily obtain external financing after a financial crisis. It is recognized that the China government should reconsider SMEs taxation laws.
💡 Analysis
Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship is found between firm growth and debt ratio, though not highly significantly. It is shown that the SMEs with high growth rates are those which will more easily obtain external financing after a financial crisis. It is recognized that the China government should reconsider SMEs taxation laws.
📄 Content
1 The Impact of the Global Crisis on SME Internal vs. External Financing in China
ShiXue He1,* and Marcel Ausloos1,2,**
1School of Business, University of Leicester Leicester, LE1 7RH , United Kingdom
2GRAPES, Group of Researchers for Applications of Physics in Economy and Sociology, rue de la Belle Jardinière, B-‐4031 Liège, Federation Wallonie-‐Bruxelles, Belgium
• email: heshixuewh@gmail.com **corresponding author: ma683@le.ac.uk, marcel.ausloos@ulg.ac.be
Abstract
Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship is found between firm growth and debt ratio, though not highly significantly. It is shown that the SMEs with high growth rates are those which will more easily obtain external financing after a financial crisis. It is recognized that the China government should reconsider SMEs taxation laws.
JEL classification code
E51 Money Supply • Credit • Money Multipliers
E41 Demand for Money
C25 Discrete Regression and Qualitative Choice Models
G01
C55
Financial Crises
Large Data Sets: Modeling and Analysis
2
I. INTRODUCTION
The financing sources of small and medium size enterprises (SMEs) can be divided into internal financing and external financing (Ross et al., 2013). The internal financing is obtained from firm owners, retained earnings or depreciation (Ross et al., 2013).
By itself, internal financing cannot satisfy an SME development. Thus, SMEs are looking for other means of financing: among these, bank loans are among the main sources. However, banks set several restrictions when lending to SMEs; for example, banks increase the costs for loans as well as the collateral and shorten the repayment period. Often, SMEs cannot provide enough collateral assets or reliable financial statements to offset the information asymmetry and adverse selection risks for money lenders (Paulet et al., 2014). Understandably, banks prefer to deal with large, old, known companies with high information transparency (Nguyen et al., 2015). Thus, compared to internal financing, external financing is expensive and hard to obtain for small businesses (Jiang et al., 2014).
One has already been much concerned about the impact of the financial crisis on SMEs, - mainly due to the consequently numerous bankruptcies. One can point to the overall financial environment of a country or to the whole world. A practical cause has been found in the increased cost of production together with a decreased demand of whatever product. It is easily pointed out that the decrease in profit implies that any internal financing possible options will decrease.
Moreover, the global financial crisis which broke out in 2008 is considered by the IMF (http://www.theguardian.com/business/2008/apr/09/useconomy.subprimecrisis ) to have been the most dangerous crisis since the Great Depression. During this recession period, the financing problems for SMEs became even worse than usual. For example, the banks especially large banks set several restrictions when lending to SMEs: banks increase the costs for loans as well as the collateral and shorten the repayment period in order to reduce risks during the financial crisis. Consider the PR China case: according to the statistics of CBRC (China Banking Regulatory Commission), the total lending by state-controlled banks in 2008 are 2.2 trillion. However, the small business loans only account for 15 percent (i.e. 300 billion). More than 20 percent of the registered SMEs went bankrupt and another 20 percent are still facing severe shortages of capital, e.g. as noticed in the first quarter of 2009 (Cunningham, 2011). Compared to the state-owned businesses, the SMEs received much less protection and support from the China government during the crisis
Thus, it seems useful to pin point the determinants of SMEs capital structure changes, in particular ca. financial crisis time, in order to expect solutions or at least give some advice in order to reduce unfortunate issues. The present article is organized along such concerns about financing difficulties of SMEs, taking into account information asymmetry, relationships between banks and enterprises, and internal limitations within the SME
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